Question

	2013	2014
Sales		$2100
Cost of Goods Sold		$1200
Other operating expenses		$200
Depreciation Expense		$225
Interest Expense		$175
Current Assets	$1000	$1300
Total Fixed Assets	$3500	$4000
Accumulated Depreciation	$1250	This can be determined from the information given
Current Liabilities	$900	$975
Long-term Debt	$1500	$1350
Common Stock	$400	This can be determined from the information given

A company has the financial data above for years 2013 and 2014. The average tax rate is 35% and the dividend payout ratio is 65%.

A) Construct the 2014 Income Statement.

B) Construct the 2013 and 2014 Balance Sheets.

Please show all steps. Thank you.

Answer 1

A) Income Statement for the year ended 2014 (Amounts in $)

Sales	2,100
Less: Cost of goods sold	(1,200)
Gross Profit	900
Less: Expenses
Other operating expenses	(200)
Depreciation Expense	(225)
Interest Expense	(175)
Income before taxes	300
Less: Income taxes ($300*35%)	(105)
Net Income	195

Dividend to be paid in 2014 = Net Income*65% = $195*65% = $126.75

B) First of all we need to calculate the retained earnings balance at the end of 2013 by preparing balance Sheet for 2013.

Balance Sheet for the year ended 2013 (Amounts in $)

Assets
Fixed Assets	3,500
Less: Accumulated depreciation	(1,250)
Net Fixed Assets		2,250
Current Assets		1,000
Total Assets		3,250
Liabilities and Stockholder's Equity
Current Liabilities		900
Long-term Debt		1,500
Stockholder's Equity
Common Stock	400
Retained Earnings ($850-$400)	450
Total Stockholder's Equity ($3,250-$900-$1,500)		850
Total Liabilities and Stockholder's Equity		3,250

For Calulating the retained earnings balance of year 2017 we need to prepare the retianed earnings statement which is shown as follows:-

Retained Earnings Statement for 2014 (Amounts in $)

Opening Balance (Beginning of 2014)	450
Add: Net Income	195
Less: Dividends paid	(126.75)
Closing Balance (end of 2014)	518.25

Balance Sheet for the year ended 2014 (Amounts in $)

Assets
Fixed Assets	4,000
Less: Accumulated depreciation ($1,250+$225)	(1,475)
Net Fixed Assets		2,525
Current Assets		1,300
Total Assets		3,825
Liabilities and Stockholder's Equity
Current Liabilities		975
Dividend Payable		126.75
Long-term Debt		1,350
Stockholder's Equity
Common Stock (Balancing figure) (1,373.25-518.25)	855
Retained Earnings (from retained earnings statement)	518.25
Total Stockholder's Equity (3,825-975-126.75-1,350)		1,373.25
Total Liabilities and Stockholder's Equity		3,825

Common Stock at the year ended 2014is taken as a balancing figure.