Chapter 5, Problem 21P

1.

To determine

Prepare the worksheet to develop Company S’s financial statements for the first 6 months of 2016.

Explanation of Solution

Worksheet: A worksheet is a tool that is used while preparing a financial statement. It is a type of form, having multiple columns and it is used in the adjustment process.

Prepare the worksheet to develop Company S’s financial statements for the first 6 months of 2016:

Table (1)

Working notes:

a. Calculate the amount of bad debt expense:

$\begin{array}{c}\text{Bad debt expense = Net sales amount}\times \text{Average uncollectible accounts}\\ =\$90,000\times .5\%\\ =\$450\end{array}$

b. Calculate the amount of interest revenue:

$\begin{array}{c}\text{Interest revenue = }\left(\begin{array}{l}\text{Note receivable amount}\times \text{12\%}\times \\ \text{Period from March 1 to June 30}\end{array}\right)\\ =\$4,000\times 12\%\times \frac{4}{12}\\ =\$160\end{array}$

c. Calculate the amount of insurance expense:

$\begin{array}{c}\text{Insurance expense = }\left(\begin{array}{l}\text{Amount of prepaid insurance}\\ \times \text{Payment for 6 months}\end{array}\right)\\ =\left(\$960\times \frac{6}{12}\right)\\ =\$480\end{array}$

d. Calculate the amount of depreciation expense:

$\begin{array}{c}\text{Depreciation expense on Building =}\left[\left(\frac{\text{Building amount}}{\text{Estimated life}}\right)\times \frac{6}{12\text{months}}\right]\\ =\left[\left(\frac{\$55,000}{25}\right)\times \frac{6}{12\text{months}}\right]\\ =\$1,100\end{array}$

$\begin{array}{c}\text{Depreciation expense on Building =}\left[\left(\frac{\text{Equipment amount}}{\text{Estimated life}}\right)\times \frac{6}{12\text{months}}\right]\\ =\left[\left(\frac{\$20,000}{8\text{years}}\right)\times \frac{6}{12\text{months}}\right]\\ =\$1,250\end{array}$

$\begin{array}{c}\text{Depreciation expense}=\left(\$1,100+\$1,250\right)\\ =\$2,250\end{array}$

e. Calculate the amount of rent revenue:

$\begin{array}{c}\text{Rent revenue}\text{= }\left(\begin{array}{l}\text{Amount of unearned rent}\times \\ \text{Period from 1/2/2016 to 30/6/2016}\end{array}\right)\\ =\$1,800\times \frac{5}{12}\\ =\$750\end{array}$

f. Calculate the amount of interest expense:

$\begin{array}{c}\text{Interest expense}\text{= }\left(\begin{array}{l}\text{Amount of discount on bonds payable}\\ \text{+ 10\% of discount on bonds payable}\end{array}\right)\\ =\$600+60\\ =\$660\end{array}$

g. Calculate the amount of income tax expense for first 6 months:

Calculate estimated annual pre-tax income:

$\begin{array}{c}\text{Estimated annual pretax income = }\left(\begin{array}{l}\text{Pre-tax income for 6 months +}\\ \text{ Pre-tax income for2nd half }\end{array}\right)\\ =\left(\$90,910-\$80,460\right)+\$11,550\\ =\$10,450+\$11,550\\ =\$22,000\end{array}$

Calculate estimated effective income tax rate:

$\begin{array}{c}\text{Estimated effective income tax rate = }\left[\frac{\left(\begin{array}{l}\text{15\% on taxable income + }\\ \text{30\% on Balance \$2,000 income}\end{array}\right)}{\text{Estimated annual pretax income}}\right]\\ =\left[\frac{\left(\text{\$3,000 + \$600}\right)}{\$22,000}\right]\\ =16.4\end{array}$

Calculate the amount of income tax expense for first 6 months:

$\begin{array}{c}\begin{array}{l}\text{Income tax expense}\\ \text{for first 6 months}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Pre-tax income for 6 months}\times \\ \text{Estimated effective income tax rate}\end{array}\right)\\ =\$10,450\times 16.4\%\\ =\$1,714\end{array}$

2 (a)

To determine

Prepare the income statement for the first 6 months of 2016.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the income statement for the first 6 months of 2016:

Company S
Interim Income statement
For the period ended June 30, 2016
Particulars	Amount ($)	Amount ($)
Sales		90,000
Less: Cost of goods sold		(48,600)
Gross profit		41,400
Operating expenses:
Selling expenses	21,000
Administrative expenses	10,200
Total operating expenses		(31,200)
Pre-tax operating income		10,200
Other items:
Interest revenue	160
Rent revenue	750
Interest expense	(660)
Total other revenues and expenses		250
Income before income taxes		10,450
Less: Income tax expense		(1,714)
Net income		$8,736
Earnings per share		$1.09

Table (2)

Working notes:

h. Calculate earnings per share for 6 months:

$\begin{array}{c}\text{Earnings per share for first 6 months}\text{=}\frac{\text{Net income }}{\text{Number of Common stock oustanding}}\\ =\frac{\$8,736}{8,000\text{ Shares}}\\ =\$1.09\end{array}$

2 (b)

To determine

Prepare the income statement for the second quarter of 2016.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the income statement for the second quarter of 2016:

Company S
Interim Income statement
For the period ended June 30, 2016
Particulars	Amount ($)	Amount ($)
Sales		50,000
Less: Cost of goods sold		(25,600)
Gross profit		24,400
Operating expenses:
Selling expenses	12,200
Administrative expenses	5,990
Total operating expenses		(18,190)
Pre-tax operating income		6,210
Other items:
Interest revenue	120
Rent revenue	450
Interest expense	(330)
Total other revenues and expenses		240
Income before income taxes		6,450
Less: Income tax expense		(1,014)
Net income		$5,436
Number of shares		8,000 shares
Earnings per share		$0.68

Table (3)

Working notes:

i. Calculate the amount of sales for second quarter:

$\begin{array}{c}\text{Sales for second quarter = }\left(\begin{array}{l}\text{Amount of sales in trial balance }\\ \text{as of June 30, 2016}-\text{Amount }\\ \text{of sales at the end of first quarter of 2016}\end{array}\right)\\ =\$90,000-\$40,000\\ =\$50,000\end{array}$

j. Calculate the amount of cost of goods sold for 3 months:

$\begin{array}{c}\text{Cost of goods sold for second quarter = }\left(\begin{array}{l}\text{Amount of cost of goods sold}\\ \text{ in trial balance as of June 30, 2016}\\ -\text{Amount of cost of goods }\\ \text{sold at the end of first quarter of 2016}\end{array}\right)\\ =\$48,600-\$23,000\\ =\$25,600\end{array}$

k. Calculate the amount of selling expenses for second quarter:

$\begin{array}{c}\text{Selling expenses for 3 months = }\left(\begin{array}{l}\text{Amount of selling expenses}\\ \text{ in the worksheet}-\\ \text{Amoutn of selling expense}\\ \text{ at the end of first quarter of 2016}\end{array}\right)\\ =\left(\$19,750+\$1,250\right)-\$8,800\\ =\$21,000-\$8,800\\ =\$12,200\end{array}$

l. Calculate the amount of administrative expenses for second quarter:

$\begin{array}{c}\text{Administrative expenses for second quarter = }\left(\begin{array}{l}\text{Amount of Administrative expenses}\\ \text{ in the worksheet}-\text{Amoutn of administrative}\\ \text{expense at the end of first quarter of 2016}\end{array}\right)\\ =\left(\$8,170+\$450+\$480+\$1,100\right)-\$4,210\\ =\$10,200-\$4,210\\ =\$5,990\end{array}$

m. Calculate the amount of interest revenue for second quarter:

$\begin{array}{c}\text{Interest revenue for second quarter = }\left(\begin{array}{l}\text{Note receivable amount}\times \text{12\%}\times \\ \text{Revenue earned for 3 months}\end{array}\right)\\ =\$4,000\times 12\%\times 3/12\\ =\$120\end{array}$

n. Calculate the amount of rent revenue for second quarter:

$\begin{array}{c}\text{Rent revenue for 3 months =}\left(\begin{array}{l}\text{Amount of unearned rent}\times \\ \text{Revenue earned for 3 months}\end{array}\right)\\ =\left(\$1,800\times \frac{3}{12}\right)\\ =\$450\end{array}$

o. Calculate the amount of interest expense for second quarter:

$\begin{array}{c}\text{Interest expense}\text{for 3 months= }\left[\frac{\left(\begin{array}{l}\text{Amount of discount on bonds payable}\\ \text{+ 10\% of discount on bonds payable}\end{array}\right)}{2}\right]\\ =\left[\frac{\$600+60}{2}\right]\\ =\$330\end{array}$

p. Calculate the amount of income tax expenses for second quarter:

$\begin{array}{c}\text{Income tax expenses for 3 months = }\left(\begin{array}{l}\text{Amount of income tax expense}\\ \text{ in the worksheet}-\\ \text{Amoutn of incoem tax expense}\\ \text{ at the end of first quarter of 2016}\end{array}\right)\\ =\$1,714-\$700\\ =\$1,014\end{array}$

q. Calculate earnings per share for second quarter:

$\begin{array}{c}\text{Earnings per share for 3 months}\text{=}\frac{\text{Net income }}{\text{Number of Common stock oustanding}}\\ =\frac{\$5,436}{8,000\text{ Shares}}\\ =\$0.68\end{array}$

3.

To determine

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

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 S
Statement of Retained Earnings
For First 6 Months Ended June 30, 2016
Particulars	Amount ($)	Amount ($)
Retained earnings, January 1, 2016	29,600
Add: Net income	8,736
Subtotal		38,336
Less: Dividends		(3,200)
Retained earnings at June 30, 2016		$35,136

Table (4)

Working note:

r. Calculate the amount of retained earnings, January 1, 2016:

$\begin{array}{c}\text{Retained earnings, January 1, 2016 = }\left(\begin{array}{l}\text{Retained earnings amount in trial }\\ \text{balance as of June 30, 2016 + Dividend}\end{array}\right)\\ =\$26,400+\$3,200\\ =\$29,600\end{array}$

4.

To determine

Prepare the balance sheet as on June 30, 2016 of Company S.

Explanation of Solution

Balance Sheet: Balance Sheet is one of the financial statements which summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Interim financial reports: these are the financial reports prepared by the company between the two annual reports.

Prepare the balance sheet as on June 30, 2016 of Company S:

Company S
Balance Sheet
As on June 30, 2016
Assets
Current assets:	Amount ($)	Amount ($)
Cash		7,200
Accounts receivable		9,850
Note receivable		4,000
Interest receivable		160
Inventory		24,400
Prepaid insurance		480
Total current assets		46,090
Property and equipment	80,000
Accumulated depreciation	(22,350)
Net property, plant and equipment		57,650
Total assets		$103,740
Liabilities
Current liabilities:
Accounts payable		8,000
Interest payable		600
Dividends payable		3,200
Income tax payable		1,714
Unearned rent		1,050
Bonds payable	12,000
Less: Discount on bonds payable	(540)	11,460
Total liabilities		26,024
Shareholders’ Equity
Contributed Capital:
Common stock	8,000
Additional paid in capital on common stock	34,580
Retained earnings	35,136
Total shareholders’ equity		77,716
Total liabilities and shareholders’ equity		$103,740

Table (5)