Question

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Page Campbell Manufacturing Company (CMC) was started when it acquired $80,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, Option 2. Total assets $112,000 labor, and overhead) amounting to $75,000 CMC also incurred $60,000 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made 5,000 units of product and sold 4,000 units at a price of $35 each. All transactions were cash uired Page 41 a. Prepare a GAAP-based income statement and balance sheet under each of the two options b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors. e. Assume that CMC provides an incentive bonus to the company president equal to 20 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus minimizes the amount of the company's income tax expense Requirement d. Describe an incentive compensation plan that would avoid a conflict of interest between the president and the owners d. Assume a 30 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that e. Comment on the conflict of interest between the company president as determined in Requirement c and the owners of the company as indicated in Highlight Next Highlight

Answer 1

Answer a)

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Answer b) Investors and creditors are attracted to higher earnings. Option 2 is more likely to leave a favorable impression on investors and creditors as the earnings after taxes is more than Option 1.

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Answer c)

It is quite self explanatory that Option 2 provides better bonus to the company president.

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Answer d) Amount of income tax

Option 1   Option 2
Income taxes   $6,000.00    $9,600.00

Option 1 minimises the tax expense.

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