Question

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows: Current Assets Liabilities Cash $ 20,000 Accounts payable $ 22,000 Accounts receivable 25,000 Notes payable 30,000 Inventory 35,000 Bonds payable 60,000 Prepaid expenses 13,000 Fixed Assets Stockholders’ Equity Gross plant and equipment $ 260,000 Preferred stock $ 30,000 Less: Accumulated depreciation 52,000 Common stock 65,000 Paid in Capital 35,000 Net plant and equipment $ 208,000 Retained earnings 59,000 Total assets $ 301,000 Total liabilities and stockholders’ equity $ 301,000 Sales for 20X2 were $270,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $27,000. 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, 20X1 balances. The tax rate averaged 20 percent. $3,000 in preferred stock dividends were paid, and $5,400 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding. During 20X2, the cash balance and prepaid expenses balances were unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of $45,000. Accounts payable increased by 30 percent. Notes payable increased by $7,000 and bonds payable decreased by $15,000, both at the end of the year. The preferred stock, common stock, and capital paid in excess of par accounts did not change.

a. Prepare an income statement for 20X2. (Round EPS answer to 2 decimal places.)

b. Prepare a statement of retained earnings for 20X2.
c. Prepare a balance sheet as of December 31, 20X2. (Amounts to be deducted should be indicated with parentheses or a minus sign.)

Answer 1

a.

Baxter Corporation Income Statement For the year ended December 31, 20X2
	$
Sales	270,000
Cost of Goods Sold	162,000
Gross Profit	108,000
Selling and Administrative Expenses	27,000
EBITDA	81,000
Depreciation Expense	20,800
EBIT	60,200
Interest Expense	10,200
EBT	50,000
Income Tax Expense ( 20 % )	10,000
Net Income	$ 40,000
Preferred Dividend	3,000
Earnings available for common stockholders	$ 37,000
Common Shares Outstanding	10,000
Earnings per Share ( EPS )	$ 3.70

b.

Baxter Company Statement of Retained Earnings For the year ended December 31, 20X2
Beginning balance	$ 59,000
Add: Net Income	40,000
Less: Dividends	(8,400)
Ending balance	$ 90,600

c.

Baxter Company Balance Sheet December 31, 20X2
Assets	$	$	Liabilities and Stockholders' Equity	$	$
Cash	20,000		Accounts Payable	28,600
Accounts Receivable	27,500		Notes Payable	37,000
Inventory	38,500		Total Current Liabilities		65,600
Prepaid Expenses	13,000		Bonds Payable		45,000
Total Current Assets		99,000	Total Liabilities		110,600
Fixed Assets			Stockholders Equity
Equipment, at Cost	305,000		Preferred Stock	30,000
Less: Accumulated Depreciation	(72,800)	232,200	Common Stock	65,000
			Paid-in Capital	35,000
			Retained Earnings	90,600
			Total Stockholders' Equity		220,600
Total Assets		$ 331,200	Total Liabilities and Stockholders' Equity		$ 331,200