Question

The information on the following page was obtained from the records of Breanna, Inc.:

Accounts receivable	$	10,200
Accumulated depreciation		50,900
Cost of goods sold		124,000
Income tax expense		9,000
Cash		61,000
Sales		196,000
Equipment		124,000
Selling, general, and administrative expenses		31,000
Common stock (9,100 shares)		95,000
Accounts payable		11,900
Retained earnings, 1/1/16		23,500
Interest expense		5,400
Merchandise inventory		38,400
Long-term debt		39,000
Dividends declared and paid during 2016		13,300

Except as otherwise indicated, 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 ended December 31, 2016. There were no changes in paid-in capital during the year.

Required:

a. Prepare an income statement and statement of changes in stockholders' equity for the year ended December 31, 2016, and a balance sheet at December 31, 2016, for Breanna, Inc. Based on the financial statements that you have prepared for part a, answer the questions in parts b-e.

b. What is the company's average income tax rate?

c. What interest rate is charged on long-term debt?

d. What is the par value per share of common stock?

e. What is the company's dividend policy (i.e., what proportion of the company's earnings are used for dividends)?

Answer 1

a.

Income statement
Sales	196,000.00
less: cost of goods sold	124,000.00
Gross profit	72,000.00
less:Selling, general & administrative exp	31,000.00
Operating income	41,000.00
less: Interest expense	5,400.00
Earnings before tax	35,600.00
Less: income tax expense	9,000.00
Net income	26,600.00

Statement of changes in stockholder's equity:

Paid-in capital
Common Stock		95,000.00
Retained earnings
Beginning balance	23,500.00
Add: Net income	26,600.00
less: dividends declared and paid	13,300.00
Ending balance		36,800.00
Total stockholder's equity		131,800.00

Balance sheet:

Assets
Cash	61,000.00
Merchandise inventory	38,400.00
Accounts receivable	10,200.00
Total current assets		109,600.00
Equipment	124,000.00
less: accumulated depreciation	50,900.00
Net equipment		73,100.00
Total assets		182,700.00
Liabilities
Accounts payable	11,900.00
Long term debt	39,000.00
Total liabilities		50,900.00
Stockholder's equity
Common stock	95,000.00
Retained earnings	36,800.00
Total stockholder's equity		131,800.00
Total liabilities and stockholder's equity		182,700.00

b. Average income tax rate = income tax expense/earnings before tax = 9000/35600 = 25.28% (or rounded off to 25%)

c. Interest rate = Interest expense/long term debt = 5400/39000 = 13.85% (or rounded off to 14%)

d. Par value per share of common stock = $95,000/9,100 shares = $10.44 (or rounded off to $10)

e. Dividend policy = dividend amount/net income amount = 13300/26600 = 50%