Question

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:
  

Current Assets			Liabilities
Cash	$	13,000	Accounts payable	$	15,000
Accounts receivable		18,000	Notes payable		23,000
Inventory		28,000	Bonds payable		53,000
Prepaid expenses		12,300
Fixed Assets			Stockholders’ Equity
Gross plant and equipment	$	253,000	Preferred stock	$	23,000
Less: Accumulated depreciation		50,600	Common stock		58,000
			Paid in Capital		28,000
Net plant and equipment	$	202,400	Retained earnings		73,700
Total assets	$	273,700	Total liabilities and stockholders’ equity	$	273,700

Sales for 20X2 were $235,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $23,500. Depreciation expense was 11 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 9 percent, while the interest rate on the bonds payable was 15 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

$2,300 in preferred stock dividends were paid, and $9,560 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 9 percent. A new machine was purchased on December 31, 20X2, at a cost of $38,000.

Accounts payable increased by 35 percent. Notes payable increased by $6,300 and bonds payable decreased by $11,500, 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.)

Answer 1

	Baxter Corporation
	20X2 Income statement
Sales	235000
Cost of Goods sold	141000	(60% of sales)
Gross Profit	94000
Selling and administrative expense	23500
Depreciation expense	27830	(11%*253000)
Operating Profit	42670
Interest expense	10020	(23000*0.09+53000*.15)
Earning before taxes	32650
Taxes	6530	(20%*32650)
Earning after taxes	26120
Preferred Stock Dividends	2300
Earnings attributable to common	23820
shareholders
Shares Outstanding	10000
Earning Per Share	2.382	(23820/10000)

	Baxter Corporation
Note 1	20X2 Statement of Retained Earnings
Retained earnings balance January 1, 20X2		73700
Add: Net Profit earned after taxes		26120
Less: Preference dividend		-2300
Less: Dividend paid to equity shareholders		-9560
Retained earnings balance December 31, 20X2		87960

		Baxter Corporation
		20X2 Balance Sheet
	Assets		Liabilities and Stockholder's Equity
Current Assets:		Liabilities
Cash	13000	Accounts Payable	20250
Account Receivable	19620	(15000*1.35)
(18000*1.09)		Notes Payable	29300
Inventory	30520	Bonds Payable	41500
(28000*1.09)
Prepaid Expnese	12300	Stock holder's equity
		Prefered Stock	23000
Fixed Assets		Common stock	58000
Gross Plant and Machinery	291000	Paid in Capital	28000
(253000+38000)
Less Accumulated depreciation	78430	Retained Earnings	87960
(50600+27830)		(Note 1)
Net Plant and equipment	212570
Total	288010	Total	288010