FACTS: 1. Both companies begin operations by exchanging stock for $10,000 in cas
ID: 2511113 • Letter: F
Question
FACTS:
1. Both companies begin operations by exchanging stock for $10,000 in cash and 300 widgets. The widgets had a value of $30,000.
2. Transactions - all on a cash basis.
Year One Year Two
Sales $ 200,000 - a $322,500 - c
Purchases $112,500 - b $224,000 - d
Expenses $ 50,000 $ 80,000
a. 1000 units
b. 900 units at a cost of $125/unit
c. 1500 units
d. 800 units @ $130 per unit, next 800 more units @ a cost of $150 per unit
3. Tax Rate - 40% (assume taxes are paid on December 31st or the current year – not probable, but works for us)
REQUIRED: Prepare income statements for both companies for year one and year two, also do a balance sheet as of the end of year two.
Explanation / Answer
Income Statement (For year one)
Sales
$200000
Less: Cost of goods sold;
Purchases
$112500
Expenses
$50000
Ending inventory (100 * $125)
($12500)
($150000)
Profit before tax
$50000
Less: Tax @40 %
($20000)
Net income after tax
$30000
Income Statement (For year two)
Sales
$322500
Less: Cost of goods sold;
Beginning inventory
$12500
Purchases
$224000
Expenses
$80000
Ending inventory (100 * $150)
($15000)
($301500)
Profit before tax
$21000
Less: Tax @40 %
($8400)
Net income after tax
$12600
Balance Sheet (An Abstract) – At the end of year two
Current assets;
Ending inventory
$15000
Income Statement (For year one)
Sales
$200000
Less: Cost of goods sold;
Purchases
$112500
Expenses
$50000
Ending inventory (100 * $125)
($12500)
($150000)
Profit before tax
$50000
Less: Tax @40 %
($20000)
Net income after tax
$30000
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