Question

E4.4 (LO2) (Income Statement Presentation) The financial records of Dunbar Inc. were destroyed by fire at the end of 2019. Fortunately, the controller had kept the following statistical data related to the income statement. 1. The beginning merchandise inventory was $92,000 and decreased 20% during the current year. 2. Sales discounts amount to $17,000. 3. 30,000 ordinary shares were outstanding for the entire year. 4. Interest expense was $20,000. 5. The income tax rate is 30%. 6. Cost of goods sold amounts to $500,000. 7. Administrative expenses are 18% of cost of goods sold but only 8% of gross sales. 8. Four-fifths of the operating expenses relate to sales activities. Instructions From the foregoing information, prepare an income statement for the year 2019.

Answer 1

Ans:

DUNBAR INC.
Income Statement
For the Year Ended December 31, 2019
Revenues
Net Sales                                [Refer working note 1]		$ 1,108,000
Expenses:
Cost of Goods Sold                [Refer point 6]	$ 500,000
Selling expenses                     [Refer working note 2]	$ 360,000
Administrative expenses         [Refer point 7]        [$500,000 x 18%]	$ 90,000
Interest expense                       [Refer point 4]	$ 20,000
Total expenses		$ 970,000
Income before income tax           [$1,108,000 - $970,000]		$ 138,000
Income tax                                   [$41,400 x 30%]		$ 41,400
Net Income                                [$138,000 - $41,400]		$ 96,600

Earnings Per Share             [Net Income / shares outstanding = $96,600 / 30,000 shares]

Workings:

Gross sales*8%=cost of goods sold*18%

Gross sales=Cost of goods sold*18%/8%

=$500,000*18%/8%

=$1,125,000

Sales Discount=$17000

Net sales=Gross sales-Sales Discount=$1,125,00-$17,000=$1,108,000

Working 2:Computation of selling expenses

Selling expenses=operating expenses*4/5

Which mean

Remaining operating expenses=1/5

So

90000*5=$450,000

Selling expenses=Operating expenses*4/5=450,000*4/5=360,000