Question

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

  

Current Assets			Liabilities
Cash	$	17,000	Accounts payable	$	19,000
Accounts receivable		22,000	Notes payable		27,000
Inventory		32,000	Bonds payable		57,000
Prepaid expenses		12,700
Fixed Assets			Stockholders’ Equity
Gross plant and equipment	$	257,000	Preferred stock	$	27,000
Less: Accumulated depreciation		51,400	Common stock		62,000
			Paid in Capital		32,000
Net plant and equipment	$	205,600	Retained earnings		65,300
Total assets	$	289,300	Total liabilities and stockholders’ equity	$	289,300

Sales for 20X2 were $255,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $25,500. Depreciation expense was 10 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 12 percent, while the interest rate on the bonds payable was 14 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 30 percent.

$2,700 in preferred stock dividends were paid, and $2,076 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 12 percent. A new machine was purchased on December 31, 20X2, at a cost of $42,000.

Accounts payable increased by 35 percent. Notes payable increased by $6,700 and bonds payable decreased by $13,500, 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.)
b. Prepare a statement of retained earnings for 20X2.

c. Prepare a balance sheet as of December 31, 20X2. (Amounts to be deducted should be indicated with parentheses or a minus sign.)

  

Answer 1

Solution:-

a. Prepare an income statement for 20X2:-

BAXTER CORPORATION
20X2 Income Statement
Sales	$255,000
Cost of goods sold	153,000
Gross profit	102,000
Selling and administrative expenses	25,500
Depreciation expenses	25,700
Operating profit	50,800
Interest expense	11,220
Earing before taxes	39,580
Taxes	11,874
Earnings after taxes	27,706
Preferred stock dividends	2,700
Earnings available to common stockholders	25,006
Shares outstanding	10,000
Earnings per share	2.50

b. Prepare a statement of retained earnings for 20X2:-

BAXTER CORPORATION
STATEMENT OF RETAINED EARNINGS
For the Year Ended December 31, 20X2
Retained earnings, balance, January 1, 20X2	65,300
Add: Earnings available to common stockholders, 20X2	25,006
Deduct: Cash dividends declared in 20X2	2,076
Retained earnings, balance, December 31, 20X2	88,230

c. Prepare a balance sheet as of December 31, 20X2:-

Baxter Corporation
20X2 Balance sheet
Current Assets		Liabilities
Cash	17,000	Accounts payable	25,650
Accounts receivable	24,640	Notes payable	33,700
Inventory	35,840	Bonds payable	43,500
Prepaid expenses	12,700
Fixed Assets		Stockholders’ Equity
Gross plant and equipment	299,000	Preferred stock	27,000
Less: Accumulated depreciation	77,100	Common stock	62,000
		Paid in Capital	32,000
Net plant and equipment	221,900	Retained earnings	88,230
Total assets	312,080	Total liabilities and stockholders’ equity	312,080