Question

Pepper Company provided the incomplete financial statements shown below as well as the following additional information:

1. All sales during the year were on account.
2. There was no change in the number of shares of common stock outstanding during the year.
3. The interest expense on the income statement relates to the bonds payable; the amount of bonds outstanding did not change during the year.
4. Selected balances at the beginning of the current year were:

Accounts receivable	$	330,000
Inventory	$	440,000
Total assets	$	1,850,000

e. Selected financial ratios computed from the statements below for the current year are:

Earnings per share	$	3.72
Debt-to-equity ratio		0.870
Accounts receivable turnover		16.0
Current ratio		2.00
Return on total assets		10	%
Times interest earned ratio		5.5
Acid-test ratio		1.18
Inventory turnover		9.0

Required:

Compute the missing amounts on the company's financial statements. (Hint: What’s the difference between the acid-test ratio and the current ratio?) (Do not round intermediate calculations.)

Pepper IndustriesIncome StatementFor the Year Ended March 31Sales$4,700,000Cost of goods sold2,902,500Gross margin1,797,500Selling and administrative expenses1,456,500Net operating income341,000Interest expense62,000Net income before taxes279,000Income taxes (30%)83,700Net income$195,300

Pepper Industries Balance Sheet March 31 Current assets: Cash $37,500 Accounts receivable, net 257,500 Inventory 205,000 Total current assets 500,000 Plant and equipment, net ? Total assets ? Liabilities: Current liabilities $250,000 Bonds payable, 10% 620,000 Total liabilities 870,000 Stockholders’ equity: Common stock, $2.70 par value Retained earnings Total stockholders’ equity 1,000,000 Total liabilities and stockholders' equity $1,870,000

Answer 1

Pepper Industries
Balance Sheet
March 31
Current assets:
Cash	37500
Accounts receivable, net	257500
Inventory	205000
Total current assets	500000
Plant and equipment, net	1370000
Total assets	1870000
Liabilities:
Current liabiliites	250000
Bonds payable, 10%	620000
Total liabilities	870000
Stockholders; equity:
Common stock, $2.70 par value	141750
Retained earnings	858250
Total stockholders' equity	1000000
Total liabilities and stockholders' equity	1870000

Working:

Total assets = Total liabilities and stockholders' equity = $1870000

Plant and equipment, net = Total assets - Total current assets = $1870000 - $500000 = $1370000

Earnings per share = Net income/Number of shares of common stock outstanding

$3.72 = $195300/Number of shares of common stock outstanding

Number of shares of common stock outstanding = $195300/$3.72 = 52500

Common stock = 52500 x $2.70 = $141750

Retained earnings = Total stockholders' equity - Common stock = $1000000 - $141750 = $858250