Question

Problem 5-12A New West Company recently hired a new accountant whose first task was to prepare the financial statements for the year ended December 31, 2021. The following is what he produced: NEW WEST COMPANY Income Statement December 31, 2021 Sales $395,000     Less: Unearned revenue $5,500              Purchase discounts 3,480 8,980 Total revenue 386,020 Cost of goods sold     Purchases 232,000     Less: Purchase returns and allowances 4,000     Net purchases 236,000     Add: Sales returns and allowances 7,500     Cost of goods available for sale 243,500     Add: Freight out 9,500 Cost of selling merchandise 253,000 Gross profit margin 133,020 Operating expenses     Freight in 4,500     Insurance expense 10,500     Interest expense 2,500     Rent expense 18,000     Salaries expense 42,000 Total operating expenses 77,500 Profit margin 55,520 Other revenues     Interest revenue $1,500     Investment by owner 3,500 5,000 Other expenses     Depreciation expense 7,000     Drawings by owner 48,000 55,000 (50,000 ) Profit from operations $5,520 NEW WEST COMPANY Balance Sheet Year Ended December 31, 2021 Assets Cash $16,780 Accounts receivable 7,800 Merchandise inventory, January 1, 2021 30,000 Merchandise inventory, December 31, 2021 24,000 Equipment $70,000 Less: loan payable (for equipment purchase) 50,000 20,000     Total assets $98,580 Liabilities and Owner's Equity Long-term investment $50,000 Accumulated depreciation—equipment 21,000 Sales discounts 2,900 Total liabilities 73,900 Owner’s equity 24,680     Total liabilities and owner’s equity $98,580 The owner of the company, Lily Oliver, is confused by the statements and has asked you for your help. She doesn’t understand how, if her Owner’s Capital account was $75,000 at December 31, 2020, owner’s equity is now only $24,680. The accountant tells you that $24,680 must be correct because the balance sheet is balanced. The accountant also tells you that he didn’t prepare a statement of owner’s equity because it is an optional statement. You are relieved to find out that, even though there are errors in the statements, the amounts used from the accounts in the general ledger are the correct amounts.

Prepare the correct multiple-step income statement. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) NEW WEST COMPANY Income Statement For the Month Ended December 31, 2021For the Year Ended December 31, 2021December 31, 2021

Answer 1

NEW WEST COMPANY

Income Statement

Year Ended December 31, 2021

                                                                                                                                             

Sales    ............................................................................................ $395,000

      Less:        Sales discounts.......................................................        $2,900

                      Sales returns and allowances.................................         7,500         10,400

      Net sales...................................................................................................          384,600

Cost of goods sold

      Inventory, January 1, 2021..............................................           $ 30,000

      Purchases.......................................................... $232,000

      Less:

          Purchase discounts.................   $3,480

          Purchase returns

            and allowances.....................     4,000             7,480

      Net purchases.................................................... $224,520

      Freight in................................................................ 4,500          229,020

      Goods available for sale...................................................            259,020

      Inventory, December 31, 2021........................................             24,000

            Cost of goods sold.............................................................................         235,020

Gross profit....................................................................................................          149,580

Operating expenses

      Freight out.......................................................................              $9,500

      Insuranceexpense............................................................              10,500

      Rent expense....................................................................              18,000

      Salaryexpense.................................................................              42,000

      Depreciation expense.......................................................              7,000

            Total operating expenses....................................................................           87,000

Profit from operations....................................................................................            62,580

Other revenues and expenses

      Interest revenue ..............................................................              $1,500

      Interest expense ..............................................................               (2,500)          (1,000)

Profit   ............................................................................................. $ 61,580