Question

2 Problems. Show All Work. (10 Points Each) 1. The following is the December 31, 1995 balance sheet for the Epics Corporation. Assets Liabilities Cash $70,000 Accounts Receivable 150,000 Inventory 280,000 Total Current Assets $ 500,000 Accounts Payable$100,000 Notes Payable 120,000 Bonds Payable 300,000 Total Liabilities $520,000 Plant and Equipment $1,250,000 Equity Less: Accum. Deprec. 250,000 Common Stock 300,000 Net plant and Equipment$1,000,000 Paid In Capital 200,000 Retained Earnings 480.000 Total Assets $1,500,000 Total Equity $980,000 Total Liab. & Equity$1,500,000 Sales for 1996 were $2,000,000, with the cost of goods sold being 55% of sales. Depreciation expense was 10% of the gross plant and equipment at the beginning of the year. Interest expense was 9% on the notes payable and 11% on the bonds payable. Selling and administrative expenses were $200,000 and the firm's tax rate is 40%. a) Prepare an income statement. b) If the dividend payout ratio for Epics is 35%, what is the value of the retained earnings account on December 31, 1996?

Answer 1

a) Preparation of income statement

		Amount ($)
Sales		2000000
Less:cost of goods sold (55%of sales)		1100000
Gross income		900000
Operating income		0
Less operating expenses
a) Depreciation	125000
b)Interest expense on note payable 9% of 120000	10800
c)Selling and administrative expenses	200000	3335800
Net operating profit		564200
Add non operating income		0
Less:non operating expense
Interest on bond payable 11% of 300000		33000
Net profit before tax		531200
Less 40% income tax		212480
Net profit after tax		318720
Add:openig balance of retained earnings in 1995 which is opening balance of Profit and loss a/c		480000
Retained earnings		$798720

b) Value of retained earnings account when on December 1996 when dividend payout ratio for EPICS is 35%

  

         

Retained earnings	$798720
less :Dividend paid 35% of retained earnings ($798720*35)/100	$279552
Value of retained earnings	$519168