Chapter 25, Problem 6APSA

To determine

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. Forecasted Annual income statement

3. To reconcile the company’s combined net income with the forecasted net income

Answer to Problem 6APSA

Solution

1. The three-column report is shown in the explanation section.

2. Forecasted annual income statement is shown in explanation section.

3.

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

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
Depreciation- Store equipment	8300		8300
Add: Allocated Expenses
Sales salaries	104000	52000	52000
Rent expenses	14160		14160
Bad debt expense	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