Question

27. Construction of income statement and balance sheet (L02-1 & (2-3 ) For December 31, 20X1. the balance sheet of Baxter Corporation was as follows: Current Assets Liabilities Cash $ 15,000 Accounts payable $ 17,000 Accounts receivable 20,000 Notes payable 25,000 Inventory 30,000 Bonds payable 55,000 Prepaid expenses 12,500 Fixed Assets Stockholders' Equity Plant and equipment (gross) $255,000 Preferred stock $ 25,000 Less: Accumulated Common stock 60,000 depreciation 51.000 Paid-in capital 30,000 Net plant and equipment $204,000 Retained earnings 69.500 Total assets $281,500 Total liabilities and stockholders equity $281.500 Sales for 20X2 were $245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20XI balances. The tax rate averaged 20 percent.

Answer 1

Answer -

a. Answer -

Income Statement

Baxter Corporation
20X2 Income Statement
	Amount
Sales	$245000
Cost of goods sold (60%)	$147000
Gross Profit	$98000
Selling and administrative expense	$24500
Depreciation expense (8%)	$20400
Operating Profit (EBIT)	$53100
Interest expense	$9100
Earning before taxes	$44000
Taxes (20%)	$8800
Earning after taxes (EAT)	$35200
Preferred stock dividends	$2500
Earnings available to common stockholder	$32700
Shares outstanding	10000
Earnings per share	$3.27

Calculations :

1. Cost of goods sold = 60% of Sales

Cost of goods sold = 0.60 * $245000

Cost of goods sold = $147000

2. Depreciation expense = 8% on Plant and equipment (gross)

Depreciation expense = 0.08 * $255000

Depreciation expense = $20400

3. Interest expense = 10% on Notes payable + 12% on Bonds payable

Interest expense = (0.10 * $25000) + (0.12 * $55000)

Interest expense = $9100

4. Taxes = 20% on Earnings before taxes

Taxes = 0.20 * $44000

Taxes = $8800

5. Earning per share = Earnings available to common stockholder / Shares outstanding

Earning per share = $32700 / 10000

Earning per share = $3.27

b. Answer -

Statement of Retained Earnings

Baxter Corporation
20X2 Statement of Retained Earnings
	Amount
Retained earnings balance, Jan. 1, 20X2	69500
Add : Earnings available to common stockholders, 20X2	32700
Less : Cash dividend declared in 20X2	5500
Retained earnings balance, Dec. 31, 20X2	96700

c. Answer -

Balance Sheet

Baxter Corporation
Balance Sheet
For December 31, 20X2
Current Assets		Liabilities
Cash	$15000	Accounts payable	$20400
Accounts receivable	$22000	Notes payable	$31500
Inventory	$33000	Bonds payable	$42500
Prepaid expenses	$12500
Fixed Assets		Stockholders Equity
Plant equipment (gross)	$295000	Preferred stock	$25000
Less : Accumulated depreciation	$71400	Common stock	$60000
Net plant and equipment	$223600	Paid in capital	$30000
		Retained earnings	$96700
Total assets	$306100	Total Liabilities and stockholders equity	$306100

Calculations :

1. Accounts receivable increase by 10%

= $20000 + ($20000 * 0.10)

= $22000

2. Inventory increase by 10%

= $30000 + ($30000 * 0.10)

= $33000

3. Plant and equipment (gross) = $255000 + $40000 (Purchase of new machine)

Plant and equipment (gross) = $295000

4. Accumulated depreciation = $51000 + $20400 = $71400

5. Accounts payable increase by 20%

= $17000 + ($17000 * 0.20)

= $20400

6. Notes payable increase by $6500

= $25000 + $6500

= $31500

7. Bonds payable decrease by $12500

= $55000 - $12500

= $42500