Introduction
There are two types of expenses mentioned here- Eliminated and continuing expenses. Eliminated costs are those expenses that will be closed along with the closure of the department, whereas the continuing expenses are those which will continue to be in existence even after the closure of the department.
To Determine
1. Three-column report showing total expenses, eliminated expenses and continuing expenses
2.
3. To reconcile the company’s combined net income with the forecasted net income
Answer to Problem 6APSA
1. The three-column report is shown in the explanation section.
2.
3.
E D Company | |
Particulars | Amount (in $) |
Combined net income | 37440 |
Add: Eliminated expenses of Department 200 | 284070 |
Less: Loss in sales on Department 200 | -290000 |
Forecasted net income | 31510 |
Explanation of Solution
Explanation
1. The three-column report is as follows:
E D Company | |||
Analysis of expenses under elimination of Department 200 | |||
Particulars | Total expenses (in $) | Eliminated Expenses (in $) | Continuing Expenses (in $) |
Cost of goods sold | 469000 | 207000 | 262000 |
Add: Direct Expenses | |||
Advertising expenses | 29000 | 12000 | 17000 |
Store Supplies used | 7800 | 3800 | 4000 |
| 8300 | 8300 | |
Add: Allocated Expenses | |||
Sales salaries | 104000 | 52000 | 52000 |
Rent expenses | 14160 | 14160 | |
| 18000 | 8100 | 9900 |
Other salary | 31200 | 31200 | |
Insurance expenses | 3100 | 770 | 2330 |
Misc. office expenses | 4000 | 400 | 3600 |
Total expenses | 688560 | 284070 | 404490 |
2. Forecasted annual income statement is as follows:
E D Company | ||
Forecasted annual income statement | ||
Under plan to eliminate Department 200 | ||
Particulars | Amount (in $) | Amount (in $) |
Sales | 436000 | |
Less: Cost of goods sold | 262000 | |
Gross Profit(A) |
| 174000 |
Add: Direct Expenses | ||
Advertising expenses | 17000 | |
Store Supplies used | 4000 | |
Depreciation- Store equipment | 8300 | |
Sales salaries | 67600 | |
Rent expenses | 14160 | |
Bad debt expense | 9900 | |
Other salary | 15600 | |
Insurance expenses | 2330 | |
Misc. office expenses | 3600 | |
Total expenses(B) |
| 142490 |
Net Income (A-B) |
| 31510 |
Note: The revised salaries are calculated by adding the salaries of sales clerks, the salaries of administrative worker and of those reassigned to sales.
Particulars | Total salaries(in$) | Sales salaries (in $) | Office Salary (in $) |
Sales - Clerks | 52000 | 52000 | |
Administrative worker | 31200 | 0 | 31200 |
Reassignment of Administrative Worker to sales | | 15600 | -15600 |
Revised salaries | 83200 | 67600 | 15600 |
3. The reconciliation of company’s net income with the forecasted income is as follows:
E D Company | ||
Reconciliation Statement of Combined Income with Forecasted Income |
Particulars | Amount (in $) |
Combined net income | 37440 |
Add: Eliminated expenses of Department 200 | 284070 |
Less: Loss in sales on Department 200 | -290000 |
Forecasted net income | 31510 |
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