Question

In 2010, Dangerous Dragon, Inc. (a retail clothing company) sold 532,084 units of its product at an average price of $ 20 per unit. The company reported estimated Returns and allowances in 2010 of 3 percent of gross revenue. Dangerous Dragon actually purchased 550,000 units of its product from its manufacturer in 2010 at an average cost of $ 12 per unit. Dangerous Dragon began 2010 with 85,000 units of its product in inventory (carried at an average cost of $ 12 per unit). Operating expenses (excluding depreciation) for Dangerous Dragon, Inc. in 2010 were $ 2,186,970 and depreciation expense was $ 189,301. Dangerous Dragon had $10,000,000 in debt outstanding throughout all of 2010. This debt carried an average interest rate of 6 percent. Finally, Dangerous Dragon's tax rate was 40 percent. Dangerous Dragon's fiscal year runs from January 1 through December 31. Given this information, construct Dangerous Dragon's 2010 multi-step income statement. What did Dangerous Dragon, Inc. record as NET INCOME on its 2010 income statement? Record your answer rounded to the nearest dollar. Do not include a dollar sign or commas in your answer. For example, record $1.234,567.89 as 1234568. For example, record $1,234,567.89 as 1234568 or negative $543.210 as -543210. Your Answer:

Answer 1

In my opinion, Alternative 2 will be more suitable because the question specifies returns as 3% of gross revenue.

INCOME STATEMENT (Alternative 1) $ 1,06,41,680.00 $ 3,19,260.00 $ 1,03,22,420.00 $ 61,93,452.00 $ 41,28,968.00 Gross Sales Less: Return and allowances Net Sales Cost of goods Sold Gross Profit Operating Expenses $ 1,89,301.00 $ 21,86,970.00 Depreciation Other Operating Expenses $ 23,76,271.00 $ 17,52,697.00 Total Operating Expenses Income from Operations Other Expenses $ 6,00,000.00 Interest Expense Total Other Expenses 6,00,000.00 $ 11,52,697.00 Net Income before Taxes Income Taxes Net Income after Taxes 2$ 4,61,078.80 6,91,618.20 Net Sales in units = 532,084 units Returns = 3% of 532,084 i.e. 15,962.52 units I have considered returns as 15,963 units Alternatively, returns can be considered in terms of revenue. This will result in rounding off difference and COGS will be calculated as 60% of Net Sales Revenue ($12/$20) INCOME STATEMENT (Alternative 2) Gross Sales $ 1,06,41,680.00 $ 3,19,250.40 $ 1,03,22,429.60 $ 61,93,457.76 $ 41,28,971.84 Less: Return and allowances Net Sales Cost of goods Sold Gross Profit Operating Expenses $ 1,89,301.00 $ 21,86,970.00 Depreciation Other Operating Expenses Total Operating Expenses Income from Operations Other Expenses $ 23,76,271.00 $ 17,52,700.84 $ 6,00,000.00 Interest Expense Total Other Expenses Net Income befre Taxes 6,00,000.00 $ 11,52,700.84 2$ Income Taxes Net Income after Taxes 4,61,080.34 6,91,620.50

Note: Be careful while reading figures (commas are placed as per Indian accounting system)