Intermediate Accounting
Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
Question
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Chapter 4, Problem 4.18BYP
To determine

Balance sheet:

This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

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.

To Prepare: The balance sheet and income statement of Corporation C.

Expert Solution & Answer
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Explanation of Solution

Prepare the balance sheet for Corporation C.

Corporation C
Balance sheet
Assets Amount($) Amount($)
Cash 15,000  
accounts receivable(net) (5) 12,000  
Inventory (4) 30,000  
prepaid expenses and other current assets (9) 3,000  
                 current assets (8)   60,000
property, plant and equipment(net) (10)   140,000
Total assets (2)   200,000
Liabilities and shareholders' equity    
accounts payable (7) 25,000  
short term notes 5,000  
                 current liabilities (6)   30,000
bonds payable (12)   20,000
shareholders' equity (11)   150,000
Total liabilities and shareholders’ equity (2)   200,000

Table (1)

Prepare the income statement for Corporation C:

Corporation C
Income statement
Particulars Amount($) Amount($)
Sales (1) 300,000  
less: cost of goods sold (3) (180,000)  
gross profit (3)   120,000
operating expenses (15)   (96,000)
interest expense (13)   (2,000)
tax expense (14)   (7,000)
Net income   15,000

Table (2)

Working notes:

Profit margin on sales = Net incomeSales=5%Sales=$155%=$300,000 (1)

Return on assets = Net incomeTotal assets=7.5%Total assets= $157.5%=$200,000 (2)

Gross profit margin =Gross profitSales=40%Gross profit=$300,00040%=$120,000Cost of goods sold =SalesGross profit=$300,000$120,000=$180,000 (3)

Inventory turnover ratio =Cost of goods soldInventory=6Inventory=$180,0006=$30,000 (4)

Receivables turnover ratio = SalesAccounts receivable=25Accounts receivable=$300,00025=$12,000 (5)

Acid-test ratio=[Cash+Accounts receivable+short term investmentsCurrent liabilities]=.9Current liabilities=$15,000+$12,000+0.9=$30,000 (6)

Accounts payable = Current liabilitiesShort term notes=$30,000$5,000=$25,000 (7)

Current ratio=Current assetsCurrent liabilities=2Current assets=$30,000×$2,000=$60,000 (8)

Prepaid expenses and other current assets=[Current assets(Cash+Accounts receivable+Inventory)]=[$60,000($15,000+$12,000+$30,000]=$3,000 (9)

Property, plant and equipment=Total assetsCurrent assets=$200,000$60,000=$140,000 (10)

Return on shareholders' equity=Net incomeShareholders' equity=10%Shareholders' equity=$15,00010%=$150,000 (11)

Debt to equity ratio= Total liabilitiesShareholders' equity=1÷3Total liabilities=$150×1÷3=$50,000Bonds payable =Total liabilitiesCurrent liabilities=$50,000$30,000=$20,000 (12)

Interest expense= 8%×(Short-term notes+Bonds)=8%×($5,000+$20,000)=$2,000 (13)

Times interest earned ratio=(Net income+ Interest +taxes)Interest=12=($15,000+$2,000+Taxes)2=$12,000Times interest earned ratio=($15,000+$2,000+Taxes)=$24,000Tax expense=$24,000(15,000+2,000)=$7,000  (14)

Operating expenses=[(SalesCost of goods soldInterest expenseTax expense)Net income]=($300,000$180,000$2,000$7000)$15,000=$96,000 (15)

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Chapter 4 Solutions

Intermediate Accounting

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