Question

Selected data for the Clinks Company for 2020 are given below:  

Common stock--$5 par value	$1,000,000
Sales, net	$800,000
Selling and administrative expenses	$150,000
Cash dividends declared and paid	$40,000
Cost of goods sold	$380,000
Depreciation expense	$55,000
Interest Revenue	$6,000
Loss on write-down of obsolete inventory	$19,000
Retained earnings (as of 12-31-19)	$960,000
Operating loss on discontinued Sand Division up to point of sale in 2020	$12,000
Loss on disposal of Sand Division	$94,000

Assume the applicable federal income tax rate is 35%. All of the items of expense, revenue, and loss are included in the computation of taxable income.  In addition, the company discovered that in 2019 it had erroneously charged to expense the $74,000 cost of a tract of land purchased that year and had made the same error on its tax return for 2019. 

Required:

A.  Prepare the income statement for the year 2020. 

B.  Prepare a statement of retained earnings for the year ended December 31, 2020. 

Answer 1

a. Income Statement

Clinks Company
Income Statement
For the Year Ended December 31, 2020
Particulars	Amount	Amount
Sales		$8,00,000
Cost of Goods Sold		$3,80,000
Gross Profit		$4,20,000
Operating expenses
Selling and Adminstrative expenses	$1,50,000
Depreciation expense	$55,000	$2,05,000
Operating Income		$2,15,000
Other Income & Expenses
Interest Revenue	$6,000
Loss on write down of obsolete inventory	-$19,000
Amount erroneously charged to expenses	$74,000	$61,000
Income from continuing operations		$2,76,000
Operating loss from discontinuing operations		-$12,000
Loss on disposal of division		-$94,000
Net Income before tax		$1,70,000
Income Tax @35%		$59,500
Net Income after tax		$1,10,500
Number of shares outstanding		$2,00,000
($1000,000 /$5 = 200,000 shares)
Earnings Per Share ($ 110,500/ 200,000)		$0.55

b. Statement of retained earnings

Clinks Company
Statement of Retained Earnings
For the Year Ended December 31, 2020
Particulars	Amount
Retained earnings as on 12-31-19	$9,60,000
Add: Net Income earned in 2020	$1,10,500
Subtotal	$10,70,500
Less: Cash dividend declared and paid	-$40,000
Retained earnings as on 12-31-20	$10,30,500

Answer 2

420000 205000 215,000 Clinks Company Income Statement Net Sales 800000 Less Cost of Goods Sold 380000 Gross Profit Operating Expenses Selling & Administrative expenses 150000 Depreciation Expenses 55000 Total Operating Expenses Income from operations Other Revenues and Gains Interest Revenue 6000 Other expenses & losses Loss on write-down of obsolete Inventory - 19000 Income Before Tax Less Tax expense Income from continuing operations Discontinued operations: Operating Loss on discontinued Sand Division, net of tax -7800 Loss on disposal of Sand division net of taxes -61100 Net Income -13000 202,000 70,700 131,300 -68900 62,400

Statement of Retained Earnings Beginning Balance Prior Period Adjustment - Correction of error in expensing Land Balance January 1, as restated Add Net Income Less Dividend paid Ending Balance 960000 48100 1,008,100 62,400 -40000 968,100