Chapter 6, Problem 6.4P

Preparing an Income Statement and Computing the Receivables Turnover Ratio with Discounts, Returns, and Bad Debts (AP6-4)

Tungsten Company, Inc., sells heavy construction equipment. There are 10,000 shares of capital stock outstanding. The annual fiscal period ends on December 31. The following condensed trial balance was taken from the general ledger on December 31, current year:

Account Titles	Debit	Credit
Cash	$ 33,600
Accounts receivable (net)	14,400
Inventory, ending	52,000
Operational assets	40,000
Accumulated depreciation		$ 16,800
Liabilities		24,000
Capital stock		72,000
Retained earnings, January 1, current year:		9,280
Sales revenue		147,100
Sales returns and allowances	5,600
Cost of goods sold	78,400
Selling expense	14,100
Administrative expense	15,400
Bad debt expense	1,600
Sales discounts	6,400
Income tax expense	7,680
Totals	$269,180	$269,180

Required:

1. 1. Beginning with the amount for net sales, prepare an income statement (showing both gross profit and income from operations). Treat sales discounts and sales returns and allowances as a contra-revenue.
2. 2. The beginning balance in Accounts Receivable (net) was $16,000. Compute the receivables turnover ratio and explain its meaning.