Question

Rundle Manufacturing Company (CMC) was started when it acquired $91,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $75,000. CMC also incurred $80,000 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, CMGC made 5,000 units of product and sold 4,300 units at a price of $36.00 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 11 percent of net income. Compute the amount d. Assume a 35 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

a) Prepare an income statement, balance sheet, under each of thetwo options.
Option A (A1)
Rundle Manufacturing Company
Income Statement
Sales (4300 units x $36)	$ 1,54,800.00
Less: Cost of Good Sold = 75000/5000 x 4300 units	$    64,500.00
Gross Profit	$    90,300.00
Less: General, selling, and administrative Expenses	$    80,000.00
Net Income	$    10,300.00
(A1)
Rundle Manufacturing Company
Balance sheet
Assets
Cash (154800-75000-80000+91000)	$    90,800.00
Inventory (5000 - 4300) x 75000/5000	$    10,500.00
Total Assets	$ 1,01,300.00
Equity
Common stock	$    91,000.00
Net Income	$    10,300.00
Total Equity	$ 1,01,300.00
A2
Option B
Rundle Manufacturing Company
Income Statement
Sales (4300 units x $36)	$ 1,54,800.00
Less: Cost of Good Sold = (75000 + 80000)/5000 x 4300 units )	$ 1,33,300.00
Gross Profit	$    21,500.00
Less: General, selling, and administrative Expenses	$                -
Net Income	$    21,500.00
A2
Rundle Manufacturing Company
Balance sheet
Assets
Cash (154800-75000-80000+91000)	$    90,800.00
Inventory (5000 - 4300) x 75000+80000/5000	$    21,700.00
Total Assets	$ 1,12,500.00
Equity
Common stock	$    91,000.00
Net Income	$    21,500.00
Total Equity	$ 1,12,500.00