Chapter 2, Problem 27P

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Sales for 20X2 were $\text{\$245,000,}$ and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $\text{\$24,500}$ . Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

$\text{\$2,500}$ in preferred stock dividends were paid, and $\text{\$5,500}$ in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of $\text{\$40,000}$ .

Accounts payable increased by 20 percent. Notes payable increased by $\text{\$6,500}$ and bonds payable decreased by $\text{\$12,500}$ , both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

a. Prepare an income statement for 20X2.

b. Prepare a statement of retained earnings for 20X2.

c. Prepare a balance sheet as of December 31, 20X2.