Chapter 5, Problem 18P

1.

To determine

Prepare separate schedule for selling expense and general administrative for Company C.

Explanation of Solution

Schedule of selling expenses is a report which reports selling expenses in a detailed manner.

Prepare a schedule for Company C’s selling expense.

Company C
Selling expenses
For the year ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Depreciation expense: sales equipment		$8,500
Advertising expense		$14,100
Sales supplies expense		$4,600
Sales salaries expense		$16,500
Transportation-out		$6,000
Total selling expenses		$49,700

Table (1)

Therefore, selling expenses of Company C is $49,700.

Schedule of selling expenses is a report which reports selling expenses in a detailed manner.

Prepare a schedule for general and administrative expenses:

Company C
General and administrative expense
For the year ended December 31, 2016
Particulars	Amount ($)
Administrative and office salaries expense	$29,500
Property tax expense	$7,700
Office supplies expense	$1,800
Bad debts expense	$1,900
Depreciation expense: building and office equipment	$10,000
Total general and administrative expenses	$50,900

Table (2)

Therefore, general and administrative expense is $50,900.

2.

To determine

Prepare a single step income statement for Company C.

Explanation of Solution

Single-step income statement: It is an income statement format in which a single subtotal of all revenue items are listed in one column, and a single subtotal of all expense items including cost of goods sold are listed in another column. Thus, the subtotal of all expense items is deducted from the subtotal of all revenue items to arrive at the net income at the bottom of the statement.

Prepare a single-step income statement for Company C for the year ended December 31, 2016.

Company C
Single-Step Income Statement
For the Year Ended December 31, 2016
Particulars	Amount	Amount
	($)	($)
Revenues:
Sales (net of $5,200 discounts)	$361,500
Dividend revenue	$900
Gain on sale of sales equipment	$5,000
Total revenues (A)		$367,400
Expenses:
Cost of goods sold	$191,200
Selling expenses	$49,700
General and administrative expenses	$50,900
Interest expense	$4,900
Loss from flood	$5,500
Income tax expense (1)	$19,560
Total expenses (B)		$321,760
Income from continuing operations $\left(\text{C}=\text{A}-\text{B}\right)$		$45,640
Results from the discontinuing operations:
Loss from operations of Division M (net of $2,640 income tax credit)	$6,160
Loss on disposal of Division M (net of $2,250 income tax credit)	($5,250)	($11,410)
Net income		$34,230

Table (3)

Components of income	Earnings per common share (11,000 shares) ($110,000/$10 par)
Income from continuing operation	$4.15
Result from discontinuing operation	($1.04)
Net income		$3.11

Table (4)

Working note (1): Calculate the income tax expense:

$\begin{array}{c}\text{Income tax expense}=\left(\text{Total revenues}-\text{Total expenses}\right)\times \text{Tax rate}\\ =\left(\$367,400-\$191,200-\$49,700-\$50,900-\$4,900-\$5,500\right)\times 30\%\\ =\$65,200\times 30\%\\ =\$19,560\end{array}$

3.

To determine

Prepare the statement of retained earnings for Company C.

Explanation of Solution

Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Prepare the statement of retained earnings for the first 6 months:

Company C
Statement of Retained Earnings
For the year Ended December 31, 2016
Particulars	Amount ($)	Amount ($)
Retained earnings, January 1, 2016	428,900
Add: Net income	34,230
Subtotal		463,130
Less: Cash Dividends $\left(\$0.9\times 11,000\right)$		(9,900)
Retained earnings at June 30, 2016		$453,230

Table (5)

Therefore, retained earnings of Company C for the year ended December 31, 2016 is $453,230.

4.

To determine

Compute the net profit margin for the year 2016.

Explanation of Solution

Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.

$\text{Net profit margin}\text{=}\frac{\text{Net}\text{Income}}{\text{Net Sales Revenue}}$

Compute the profit margin for 2016:

$\begin{array}{c}\text{Net profit margin}\left(2016\right)\text{=}\frac{\text{Net}\text{Income}}{\text{Net Sales Revenue}}\\ =\frac{\$34,230}{\$361,500}\\ =9.5\%\end{array}$

Therefore, net profit margin is 9.5%.

Company C’s net profit margin ratio is increased by 1.5 percentage points from 2015 to 2016. Therefore, is indicates to have a better control over its expenses in relation to its sales. But, it is better to compare the net profit margin based on the income from continuing operations, because Company C had many items on income statement with nonrecurring nature in 2016, which is not appeared in 2015 income statement.