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E5-8 Prepare multi-step income statement and calculate profitability ratios
In its income statement for the year ended December 31, 2017, Darren Company reported the
following condensed data.
Salaries and wages expense $465,000 Loss on disposal of plant assets $83,500
Cost of goods sold 987,000 Sales revenue 2,210,000
Interest expense 71,000 Income tax expense 25,000
Interest revenue 65,000 Sales discounts 160,000
Depreciation expense 310,000 Utilities expense 110,000
Instructions
(a) Prepare a multi-step income statement.
(b) Calculate the profit margin and gross profit rate.
(c ) In 2016, Darren had a profit margin of 5%. Is the decline in 2017 a cause for concern?
(Ignore income tax effects.)
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .
(a)
Sales
Sales revenue Value
Less: Sales discounts Value
Net Sales ?
Cost of goods sold Value
Gross profit ?
Operating expenses
Salaries and wages expense Value
Depreciation expense Value
Utilities expense Value
Total operating expenses ?
Income from operations ?
Other revenues and gains
Interest revenue Value
Other expenses and losses
Loss on disposal of plant assets Value
Interest expense Value ?
Income before income taxes ?
Income tax expense Value
Net income ?
(b) Profit margin
Net income Value
Net Sales Value
Value
Gross profit rate
DARREN COMPANY
Income Statement
For the Year Ended December 31, 2017
Gross profit Value
Net sales Value
Value
After you have completed E5-8 , consider the following additional question.
1. Assume that cost of goods changed to $1,015,000 and that the income tax rate is 28%.
What impact does this change have on the multi-step income statement and the
profitability ratios?
E5-8 Solution
(a)
Sales
Sales revenue $2,210,000
Operating expenses
Salaries and wages expense 465,000
Depreciation expense 310,000
Utilities expense 110,000
Total operating expenses 885,000
Income from operations 178,000
Other revenues and gains
(b) Profit margin
Net income $63,500
Net Sales 2,050,000
(c ) During the current year Darren had a loss on the sale of property, plant, and equipment of $83,500.
This loss is not part of operating income, and it is most likely a non-recurring event, meaning that
we wouldn't expect it to happen again next year. If we ignore this loss, then Darren Company's
DARREN COMPANY
Income Statement
For the Year Ended December 31, 2017
E5-8 Solution to additional question
1.
Assume that cost of goods changed to $1,015,000 and that the income tax rate is 28%.
What impact does this change have on the multi-step income statement and the
profitability ratios?
(a)
Sales
Sales revenue $2,210,000
Less: Sales discounts 160,000
Net Sales $2,050,000
(b) Profit margin
Net income $43,560
Net Sales 2,050,000
DARREN COMPANY
Income Statement
For the Year Ended December 31, 2017
