Question

Gibson Manufacturing Company (CMC) was started when it acquired $94,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $57,200. CMC also incurred $79,200 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 4,400 units of product and sold 3,600 units at a price of $39.00 each. All transactions were cash transactions Required a-1. Prepare an income statement and balance sheet under option 1. a-2. Prepare an income statement and balance sheet under option 2. b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and c. Assume that CMC provides an incentive bonus to the company president equal to 10 percent of net income. Compute the amount d. Assume a 30 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the creditors. of the bonus under each of the two options. Identify the option that provides the president with the higher bonus. option that minimizes the amount of the company's income tax expense.

Answer 1

Ans- 2B   The most favourable option to investors & creditors is 2 as in the same we are having higher amount of retained earnings in the balancesheet          
              
Option-1 Bonus   1,440    10% of 14,400      
Option 2 Bonus   2,880    10% of 28,800      
              
Ans -2C Preference   Higher Bonus is under option 2          
              
Option 1- Income Tax Expense   4,320    30% of 14,400      
Option-2 Income Tax Expense   8,640    30% of 28,800      
              
Ans -2D   Option 1 Minimises company's income tax expense