Question

Wildhorse Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company’s fiscal year on November 30, 2022, these accounts appeared in its adjusted trial balance.

Accounts Payable$ 39,400

Accounts Receivable25,600

Accumulated Depreciation—Equipment102,000

Cash12,000

Common Stock52,500

Cost of Goods Sold914,940

Freight-Out9,730

Equipment238,590

Depreciation Expense20,700

Dividends18,000

Gain on Disposal of Plant Assets3,000

Income Tax Expense15,000

Insurance Expense13,500

Interest Expense7,500

Inventory39,100

Notes Payable65,250

Prepaid Insurance9,000

Advertising Expense50,250

Rent Expense51,000

Retained Earnings21,100

Salaries and Wages Expense178,040

Sales Revenue1,356,000

Salaries and Wages Payable9,000

Sales Returns and Allowances30,000

Utilities Expense15,300

1. Prepare a multiple-step income statement. (List other revenues before other expenses.)

2. Prepare a retained earnings statement. (List items that increase retained earnings first.)

3.  Prepare a classified balance sheet. (List current assets in order of liquidity.)

4. Calculate the profit margin and the gross profit rate. (Round answers to 1 decimal place, e.g. 15.2%)

5. The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $61,659 and expenses by $84,201.

Compute the expected new net income. (Hint: You do not need to prepare an income statement.) Then, compute the revised profit margin and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)

Answer 1

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Answer 1

Answer : 1
Wild horse Department Store
Multiple-step Income statement
For the year ended November 30, 2022
Sales revenue		1,356,000
Less: Sales Returns and Allowances		(30,000)
Net sales			1,326,000
Less: Cost of Goods Sold			914,940
Gross profit			411,060
Less: operating expense
Freight-Out		9,730
Depreciation Expense		20,700
Insurance Expense		13,500
Advertising Expense		50,250
Rent Expense		51,000
Salaries and Wages Expense		178,040
Utilities Expense		15,300
Total operating expense			338,520
Operating income			72,540
Less: income (expense)
Gain on Disposal of Plant Assets		3,000
Interest Expense		(7,500)	(4,500)
Income before tax			68,040
Income Tax Expense (less)			15,000
Net income			53,040

Answer 2

Answer : 2
Wild horse Department Store
Retained earnings statement
For the year ended November 30, 2022
Retained earnings, beginning			21,100
Add: net income			53,040
Less: Dividends (if any)			(18,000)
Retained earnings, November 30, 2022			56,140

Answer 3

Answer : 3
Wild horse Department Store
Balance sheet
November 30, 2022
Assets
Current assets
Cash		12,000
Accounts Receivable		25,600
Inventory		39,100
Prepaid Insurance		9,000
Total Current assets			85,700
Property, plant and equipment			-
Equipment		238,590
Accumulated Depreciation—Equipment		(102,000)	136,590
Total assets			222,290
Liabilities and owner's Equity
Liabilities
Current liabilities
Accounts Payable		39,400
Salaries and Wages Payable		9,000
Total current liabilities			48,400
Notes Payable			65,250
Total Liabilities			113,650
Stockholder' equity
Common Stock		52,500
Retained earnings		56,140
Total Stockholder' equity			108,640
Total Liabilities and stockholder' equity			222,290

Answer 4

Net income	53,040
Divided by: Net sales	1,326,000
Net profit ratio	4.0%
Gross profit	411,060
Divided by: Net sales	1,326,000
Gross profit rate	31.0%