Question

Gary’s TV had the following accounts and amounts in its financial statements on December 31, 2016. Assume that all balance sheet items reflect account balances at December 31, 2016, and that all income statement items reflect activities that occurred during the year then ended.

Interest expense	$	31,000
Paid-in capital		82,000
Accumulated depreciation		31,000
Notes payable (long-term)		285,000
Rent expense		69,000
Merchandise inventory		839,000
Accounts receivable		189,000
Depreciation expense		11,000
Land		123,000
Retained earnings		427,640
Cash		136,000
Cost of goods sold		1,753,000
Equipment		63,000
Income tax expense		242,640
Accounts payable		93,000
Sales revenue		2,538,000

Required:

a. Calculate the difference between current assets and current liabilities for Gary’s TV at December 31, 2016.

b. Calculate the total assets at December 31, 2016.

c. Calculate the earnings from operations (operating income) for the year ended December 31, 2016.

d. Calculate the net income (or loss) for the year ended December 31, 2016.

e. What was the average income tax rate for Gary’s TV for 2016?

f. If $425,360 of dividends had been declared and paid during the year, what was the January 1, 2016, balance of retained earnings?

Answer 1

a. Calculation of the difference between current assets and current liabilities:

Current Assets	Merchandise Inventory	839,000
	Account Receivable	189,000
	Cash	136,000
	Total	1,164,000
Current Liabilities	Accounts Payable	93,000
	Total	93,000
Difference		1,071,000

b. Calculation of Total Asssts:

Total Current Assets	1,164,000
Land	123,000
Equipment	63,000
Accumulated depreciation	(31,000)
Total Assets	1,319,000

c. Calculation of the earnings from operations (operating income) for the year ended December 31, 2016.

Sales Revenue	2,538,000
Cost of Goods Sold	1,753,000
Gross Profit	785,000
Rent expense	69,000
Depreciation expense	11,000
Earnings from operations (operating income)	705,000

d. Calculation of the net income (or loss) for the year ended December 31, 2016

Earnings from operations (operating income)	705,000
Interest Expense	31,000
Earning before taxes	674,000
Income tax expense	242,640
Net income	431,360

e. The average income tax rate:

Average Income Tax Rate = Income Tax Expense / (Operating Income - Interest Expense)

= 242,640 / ( 705,000 - 31,000)

= 242,640 / 674,000

Average Income Tax Rate = 0.36 or 36%

f. Retained earnings = Beginning balance + Net income - Dividends

427,640 = Beginning balance + 431,360 - 425,360

427,640 = Beginning balance + 6,000

Beginning balance = 427,640 - 6,000 = $421,640