2-9. Solution:
Virginia Slim Wear
Income Statement
Sales…………………………………………….….…….$1,360,000
Cost of goods sold………………………………….. 700,000
Gross profit………………………………………… 660,000
10. Income statement (LO1) Precision Systems had sales of $820,000, cost of goods of
$510,000, selling and administrative expense of $60,000, and operating profit of $103,000.
What was the value of depreciation expense? Set this problem up as a partial income
statement, and determine depreciation expense as the plug figure.
2-10. Solution:
Precision Systems
Sales…………………………………………….….……. $820,000
Cost of goods sold …………………………………. 510,000
11. Depreciation and earnings (LO1) Stein Books Inc. sold 1,900 finance textbooks for $250
each to High Tuition University in 20X1. These books cost $210 to produce. Stein Books
spent $12,200 (selling expense) to convince the university to buy its books.
Depreciation expense for the year was $15,200. In addition, Stein Books borrowed
$104,000 on January 1, 20X1, on which the company paid 12 percent interest. Both the
interest and principal of the loan were paid on December 31, 20X1. The publishing firm’s
tax rate is 30 percent.
Did Stein Books make a profit in 20X1? Please verify with an income statement
presented in good form.
2-11. Solution:
Stein Books Inc.
Income Statement
For the Year Ending December 31, 20X1
Sales (1,900 books at $250 each)………………………….… $475,000
Cost of goods sold (1,900 books at $210 each) ........... 399,000
Gross profit………………………………………..….….…….. 76,000
Selling expense……………………….….…….…….….…….…. 12,200
12. Determination of profitability (LO1) Lemon Auto Wholesalers had sales of $1,000,000
last year and cost of goods sold represented 78 percent of sales. Selling and administrative
expenses were 12 percent of sales. Depreciation expense was $11,000 and interest expense
for the year was $8,000. The firm’s tax rate is 30 percent.
a. Compute earnings after taxes.
b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests
that by increasing selling and administrative expenses to 14 percent of sales, sales can
be increased to $1,050,900. The extra sales effort will also reduce cost of goods sold
to 74 percent of sales. (There will be a larger markup in prices as a result of more
aggressive selling.) Depreciation expense will remain at $11,000. However, more
automobiles will have to be carried in inventory to satisfy customers, and interest
expense will go up to $15,800. The firm’s tax rate will remain at 30 percent. Compute
revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto
Wholesalers. Will her ideas increase or decrease profitability?
2-12. Solution:
Lemon Auto Wholesalers
Income Statement
a.Sales………………………………………………………….. $1,000,000
Cost of goods sold (78% of sales)…….….…….…. $ 780,000
Gross profit…………………..….….…….…….….… $ 220,000
Selling and administrative expense
2-12. (Continued)
b.Sales………………………………………………………….. $1,050,900
Cost of goods sold (74% of sales) …….….…….... $ 777,666
Gross profit…………………..….….…….…….….… $ 273,234
Selling and administrative expense
Ms. Carr’s ideas will increase profitability.
13. Balance sheet (LO3) Classify the following balance sheet items as current or
noncurrent:
Retained earnings Bonds payable
Accounts payable Accrued wages payable
Prepaid expenses Accounts receivable
Plant and equipment Capital in excess of par
Inventory Preferred stock
Common stock Marketable securities
2-13. Solution:
Retained earnings – noncurrent
Accounts payable – current
Prepaid expense – current
Plant and equipment – noncurrent
Inventory – current
14. Balance sheet and income statement classification (LO1 & 3) Fill in the blank spaces
with categories 1 through 7:
1. Balance sheet (BS) 5. Current liabilities (CL)
2. Income statement (IS) 6. Long-term liabilities (LL)
3. Current assets (CA) 7. Stockholders’ equity (SE)
4. Fixed assets (FA)
Indicate Whether
Item Is on Balance
Sheet (BS) or
Income
Statement (IS)
If on Balance
Sheet, Designate
Which
Category Item
_____ _____ Accounts receivable
_____ _____ Retained earnings
_____ _____ Income tax expense
_____ _____ Accrued expenses
_____ _____ Cash
_____ _____ Selling and administrative expenses
_____ _____ Plant and equipment
_____ _____ Operating expenses
_____ _____ Marketable securities
_____ _____ Interest expense
_____ _____ Sales
_____ _____ Notes payable (6 months)
_____ _____ Bonds payable, maturity 2019
_____ _____ Common stock
_____ _____ Depreciation expense
_____ _____ Inventories
_____ _____ Capital in excess of par value
_____ _____ Net income (earnings after taxes)
_____ _____ Income tax payable
2-14. Solution:
2-14. (Continued)
Indicate
Whether
Item is on
Income
Statement or
Balance
Sheet
If Item Is
on
Balance
Sheet,
Designate
Which
Category Item
BS CA Accounts Receivable
BS SE Retained Earnings
IS Sales
BS CL Notes Payable (6 Months)
BS LL Bonds Payable (Maturity 2019)
15. Development of balance sheet (LO3) Arrange the following items in proper balance sheet
presentation:
Accumulated depreciation…………………………..…….……........ $309,000
Retained earnings…………………………………………………………. 187,000
Cash……………………………………………………………………………. 14,000
Bonds payable………………………………………………………..……. 136,000
Accounts receivable…………………………………………….…….…. 54,000
2-15. Solution:
Assets
Current Assets:
Cash…………………………………….. $ 14,000
Marketable securities..….….......... 24,000
Accounts receivable….…….….…… $ 54,000
2-15. (Continued)
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable………………………….….…….….……..
Notes payable…………………………………….…….…….…
Total current liabilities…………..…….…….….…….….
Long-term liabilities…………………………..….….…….…..
$ 35,000
34,000
$ 69,000
16. Earnings per share and retained earnings (LO1 and 3) Elite Trailer Parks has an
operating profit or $200,000. Interest expense for the year was $10,000; preferred
dividends paid were $18,750; and common dividends paid were $30,000. The tax was
$61,250. The firm has 20,000 shares of common stock outstanding.
a. Calculate the earnings per share and the common dividends per share for Elite Trailer
Parks.
b. What was the increase in retained earnings for the year?