Financial Accounting for Undergraduates
Financial Accounting for Undergraduates
2nd Edition
ISBN: 9781618530400
Author: FERRIS
Publisher: Cambridge
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Chapter 13, Problem 7AP
To determine

Compute the missing amounts, and complete the financial statements of Company O.

Expert Solution & Answer
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Explanation of Solution

Prepare income statement of Company O as follows:

Company O
Income Statement
For the Year Ended December 31, 2012
ParticularsAmount
Sales revenue$7,000,000
Less: Cost of Goods sold$4,760,000
Gross profit$2,240,000
Less: Selling and administrative expenses$1,360,000
Income before interest expense and income taxes$880,000
Less: Interest expense$80,000
Income before income taxes$800,000
Less: Income tax expense (30%)$240,000
Net income$560,000

Table (1)

Working notes:

 Calculate sales revenue.

Sales revenue = Net incomeReturn on sales=$560,0008%=$7,000,000 (1)

Calculate gross profit.

Gross profit = Sales revenue ×Gross profit percentage=$7,000,000×32%=$2,240,000 (2)

Calculate cost of goods sold.

Cost of goods sold = Sales revenue Gross profit=$7,000,000$2,240,000=$4,760,000 (3)

Calculate income before income taxes.

Income before income taxes = Net income ×10.70=$560,000×10.70=$800,000 (4)

Calculate Income tax expense.

Income tax expense = Income before income taxes ×Income tax percent= $800,000×30%= $240,000 (5)

Calculate Income before interest expense and income taxes.

Income before interest expense and income taxes) = Income before income taxes + Interest expenses= $800,000+$80,000= $880,000 (6)

Calculate Selling and administrative expenses.

Selling and administrative expenses) = (Gross profit Income before interest expense and income taxes)=$2,240,000$880,000=$1,360,000 (7)

Prepare Balance sheet of Company O as follows:

Company O
Balance Sheet
December 31, 2012
Cash $710,000Current liabilities$300,000
Accounts Receivable$890,0008% Bonds payable $1,000,000
Inventory$980,000Common stock $3,700,000
Equipment (net) $3,320,000Retained earnings$900,000
Total Assets$5,900,000Total liabilities and Stockholders' equity$5,900,000

Table (2)

Working notes:

Calculate accounts receivable.

Accounts receivable turnover = Sales revenueAverage accounts receivable8=$7,000,000($860,000+x)÷28×($860,000+x)÷2=$7,000,000($860,000+x)÷2=$7,000,0008

($860,000+x)÷2=$875,000($860,000+x)=$875,000×2x=$1,750,000$860,000x=$890,000

Hint: ‘x’ denotes ending accounts receivable.

(8)

Calculate inventory.

Inventory turnover = Cost of goods soldAverage inventory5=$4,760,000($924,000+x)÷25×($924,000+x)÷2=$4,760,000($924,000+x)÷2=$4,760,0005

($924,000+x)÷2=$952,000($924,000+x)=$952,000×2x=$1,904,000$924,000x=$980,000 Financial Accounting for Undergraduates, Chapter 13, Problem 7AP

Hint ‘x’ denotes ending inventory.

(9)

Calculate cash.

Quick ratio=Cash +Accounts receivablesCurrent liabilites0.90=x+$980,000$300,0000.90×$300,000=x+$980,000$270,000=x+$980,000

x=$980,000$270,000x=$710,000

Hint ‘x’ denotes cash.

(10)

Calculate equipment.

Equipment = Total assets (Cash + Accounts receivable + Inventory)=$5,900,000($710,000+$890,000+$980,000)=$3,320,000

Calculate common stock.

Return on common stockholders' equity=Net incomeAverage common stockholders' equity16%=$560,000($3,300,000+x)÷216%×($3,300,000+x)÷2=$560,000($3,300,000+x)÷2=$560,00016%

($3,300,000+x)x÷2=$3,500,000x=($3,500,000×2)$3,300,000x=$3,700,000 (11)

Calculate bonds payable.

Bonds payable = Interest expense×10.08=$80,000×10.08=$1,000,000 (12)

Calculate current liabilities.

Current liabilites =(Total liabilites and stockholders' equity (Bonds payable +Common stock + Retained earnings))=$5,900,000($1,000,000+$3,700,000+$900,000)=$300,000 (13)

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Chapter 13 Solutions

Financial Accounting for Undergraduates

Ch. 13 - Prob. 11SSQCh. 13 - Prob. 12SSQCh. 13 - Prob. 1QCh. 13 - Prob. 2QCh. 13 - Prob. 3QCh. 13 - Prob. 4QCh. 13 - Prob. 5QCh. 13 - Prob. 6QCh. 13 - Prob. 7QCh. 13 - Prob. 8QCh. 13 - Prob. 9QCh. 13 - Prob. 10QCh. 13 - Prob. 11QCh. 13 - Prob. 12QCh. 13 - Prob. 13QCh. 13 - Prob. 14QCh. 13 - Prob. 15QCh. 13 - Prob. 16QCh. 13 - Prob. 17QCh. 13 - Prob. 18QCh. 13 - Prob. 19QCh. 13 - Prob. 20QCh. 13 - Prob. 21QCh. 13 - Prob. 22QCh. 13 - Prob. 23QCh. 13 - Prob. 1SECh. 13 - Prob. 2SECh. 13 - Prob. 3SECh. 13 - Prob. 4SECh. 13 - Prob. 5SECh. 13 - Prob. 6SECh. 13 - Prob. 7SECh. 13 - Prob. 8SECh. 13 - Prob. 9SECh. 13 - Prob. 10SECh. 13 - Prob. 11SECh. 13 - Prob. 12SECh. 13 - Prob. 13SECh. 13 - Prob. 14SECh. 13 - Prob. 15SECh. 13 - Prob. 1AECh. 13 - Prob. 2AECh. 13 - Prob. 3AECh. 13 - Prob. 4AECh. 13 - Prob. 5AECh. 13 - Prob. 6AECh. 13 - Prob. 7AECh. 13 - Prob. 8AECh. 13 - Prob. 9AECh. 13 - Prob. 10AECh. 13 - Prob. 11AECh. 13 - Prob. 1BECh. 13 - Prob. 2BECh. 13 - Prob. 3BECh. 13 - Prob. 4BECh. 13 - Prob. 5BECh. 13 - Prob. 6BECh. 13 - Prob. 7BECh. 13 - Prob. 8BECh. 13 - Prob. 9BECh. 13 - Prob. 10BECh. 13 - Prob. 11BECh. 13 - Prob. 1APCh. 13 - Prob. 2APCh. 13 - Prob. 3APCh. 13 - Prob. 4APCh. 13 - Prob. 5APCh. 13 - Prob. 6APCh. 13 - Prob. 7APCh. 13 - Prob. 8APCh. 13 - Prob. 9APCh. 13 - Prob. 10APCh. 13 - Prob. 1BPCh. 13 - Prob. 2BPCh. 13 - Prob. 3BPCh. 13 - Prob. 4BPCh. 13 - Prob. 5BPCh. 13 - Prob. 6BPCh. 13 - Prob. 7BPCh. 13 - Prob. 8BPCh. 13 - Prob. 9BPCh. 13 - Prob. 10BPCh. 13 - Prob. 1EYKCh. 13 - Prob. 2EYKCh. 13 - Prob. 3EYKCh. 13 - Prob. 4EYKCh. 13 - Prob. 5EYKCh. 13 - Prob. 6EYKCh. 13 - Prob. 7EYKCh. 13 - Prob. 8EYKCh. 13 - Prob. 9EYKCh. 13 - Prob. 10EYKCh. 13 - Prob. 11EYK
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How To Analyze an Income Statement; Author: Daniel Pronk;https://www.youtube.com/watch?v=uVHGgSXtQmE;License: Standard Youtube License