Chapter 13, Problem 7BP

To determine

Compute the missing amounts, and complete the financial statements of Company T.

Explanation of Solution

Prepare income statement of Company T as follows:

Company T
Income Statement
For the Year Ended December 31
Particulars	Amount
Sales revenue	$877,500
Less: Cost of Goods sold	$614,250
Gross profit	$263,250
Less: Selling and administrative expenses	$148,564
Income before interest expense and income taxes	$114,686
Less: Interest expense	$14,400
Income before income taxes	$100,286
Less: Income tax expense (30%)	$30,086
Net income	$70,200

Table (1)

Working notes:

 Calculate sales revenue.

$\begin{array}{c}\text{Sales revenue = }\frac{\text{Net income}}{\text{Return on sales}}\\ =\frac{\$70,200}{8\%}\\ =\$877,500\end{array}$ (1)

Calculate gross profit.

$\begin{array}{c}\text{Gross profit = Sales revenue }\times \text{Gross profit percentage}\\ \text{=}\text{\$877,500}\times 30\text{\%}\\ \text{=}\text{\$263,250}\end{array}$ (2)

Calculate cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold = Sales revenue }-\text{Gross profit}\\ \text{=}\text{\$877,500}-\$263,250\\ =\$614,250\end{array}$ (3)

Calculate income before income taxes.

$\begin{array}{c}\text{Income before income taxes = Net income }\times \frac{1}{0.70}\\ =\$70,200\times \frac{1}{0.70}\\ =\$100,286\end{array}$ (4)

Calculate Income tax expense.

$\begin{array}{c}\text{Income tax expense = Income before income taxes }\times \text{Income tax percent}\\ \text{= \$100,286}\times \text{30\%}\\ \text{= \$30,086}\end{array}$ (5)

Calculate Income before interest expense and income taxes.

$\begin{array}{c}\begin{array}{l}\text{Income before interest }\\ \text{expense and income taxes}\end{array})\text{ = Income before income taxes + Interest expenses}\\ \text{= \$100,286}\text{+\$14,400}\\ \text{= \$114,686}\end{array}$ (6)

Calculate Selling and administrative expenses.

$\begin{array}{c}\begin{array}{l}\text{Selling and }\\ \text{administrative expenses}\end{array})\text{ = }\left(\begin{array}{l}\text{Gross profit }-\text{Income before }\\ \text{interest expense and income taxes}\end{array}\right)\\ =\$263,250-\$114,686\\ =\$148,564\end{array}$ (7)

Calculate interest expense.

$\begin{array}{c}\text{Bonds payable = Bonds payable }\times \text{Interest rate}\\ =\$144,000\times 10\%\\ =\$14,400\end{array}$ (8)

Prepare Balance sheet of Company T as follows:

Company T
Balance Sheet
December 31
Cash	$92,700	Current liabilities	$81,000
Accounts Receivable	$49,050	10% Bonds payable	$144,000
Inventory	$101,250	Common stock	$301,000
Equipment (net)	$333,000	Retained earnings	$50,000
Total Assets	$576,000	Total liabilities and Stockholders' equity	$576,000

Table (2)

Working notes:

Calculate accounts receivable.

$\begin{array}{c}\text{Accounts receivable turnover = }\frac{\text{Sales revenue}}{\text{Average accounts receivable}}\\ 12=\frac{\$877,500}{\left(\$97,200+x\right)÷2}\\ 12\times \left(\$97,200+x\right)÷2=\$877,500\\ \left(\$97,200+x\right)÷2=\frac{\$877,500}{12}\end{array}$

$\begin{array}{c}\left(\$97,200+x\right)÷2=\$73,125\\ \left(\$97,200+x\right)=\$73,125\times 2\\ x=\$146,250-\$97,200\\ x=\$49,050\end{array}$

Hint: ‘x’ denotes ending accounts receivable.

(9)

Calculate total current assets.

$\begin{array}{c}\text{Current ratio}\text{=}\frac{\text{Current assets}}{\text{Current liabilites}}\\ \text{Current assets}=\$81,000\times 3\\ \text{Current assets =\$243,000}\end{array}$

Calculate inventory.

$\begin{array}{c}\text{Quick ratio = }\frac{\text{Current assets }-\text{Inventory}}{\text{Current liabilites}}\\ 1.75=\frac{\$243,000-x}{\$81,000}\\ 1.75\times \$81,000=\$243,000-x\\ \$141,750=\$243,000-x\end{array}$

$\begin{array}{c}x=\$243,000-\$141,750\\ x=\$101,250\end{array}$

Hint ‘x’ denotes ending inventory.

(10)

Calculate cash (Bank overdraft).

$\begin{array}{c}\text{Cash = Current assets }-\text{Accounts receivable + Inventory}\\ \text{=\$243,000}-\left(\$49,050+\$101,250\right)\\ =\$92,700\end{array}$

Hint ‘x’ denotes cash.

(11)

Calculate equipment.

$\begin{array}{c}\text{Equipment = Total assets }-\left(\text{Cash + Accounts receivable + Inventory}\right)\\ =\$576,000-\left(\$92,700+\$49,050+\$101,250\right)\\ =\$333,000\end{array}$ (12)

Calculate common stock.

$\begin{array}{c}\text{Return on common stockholders' equity}\text{=}\frac{\text{Net income}}{\text{ stockholders' equity}}\\ 20\%=\frac{\$70,200}{x}\\ x=\frac{\$70,200}{20\%}\\ x=\$351,000\end{array}$

$\begin{array}{c}\text{Common stock = Total stockholders' equity + Retained earnings}\\ =\text{}\$351,000-\$50,000\\ =\$301,000\end{array}$ (13)

Calculate current liabilities.

$\begin{array}{c}\text{Current liabilites =}\left(\begin{array}{l}\text{Total liabilites and stockholders' equity }-\\ \left(\text{Bonds payable +}\text{Common stock + Retained earnings}\right)\end{array}\right)\\ =\$576,000-\left(\$144,000+\$301,000+\$50,000\right)\\ =\$81,000\end{array}$ (14)