Question

P13.10B: Carlotta's Cakes Inc. is a private company reporting under ASPE. It is authorized to issue an unlimited number of common and $3 cumulative preferred shares. The following is an alphabetical list of its adjusted accounts at May 31, 2021, its fiscal year end. All accounts have normal balances.

Prepare financial statements.

Accounts payable	$ 38,500	Income tax expense	$ 11,230
Accounts receivable	15,300	Insurance expense	7,500
Accumulated depreciation—equipment	126,000	Interest expense	4,500
Cash	20,600	Inventory	70,220
Cash dividends—common	50,000	Notes payable	75,000
Cash dividends—preferred	7,500	Preferred shares	150,000
Common shares	50,000	Rent expense	24,500
Cost of goods sold	277,475	Retained earnings	73,000
Depreciation expense	42,000	Salaries expense	67,800
Dividends payable	7,500	Sales	504,500
Equipment	420,000	Supplies expense	5,875

The note payable is due in 2023. There are 10,000 common shares issued and 5,000 preferred shares issued as at May 31, 2021.

Instructions

Prepare an income statement, statement of retained earnings, and balance sheet.

Taking It Further  What ethical issues may managers face when reporting a company's financial performance?

Answer 1

Income statement

For the year ended May 31 , 2021

Sales		$ 504,500
Less: Cost of goods sold		$277,475
Gross profit		$227,025
Operating expenses :
Depreciation expense	$42,000
Insurance expense	$ 7,500
Rent expense	$24,500
Salaries expense	$67,800
Supplies expense	$ 5,875
Less: Total operating expenses		$147,675
Operating profit		$ 79,350
Less: Interest expense		$ 4,500
Net income before tax		$ 74,850
Less: Income tax expense		$ 11,230
Net income		$ 63,620

Statement of retained earnings

For the year ended May 31 ,2021

Beginning balance of retained earnings		$73,000
Add: Net income		$63,620
Balance before paying dividend :		$136,620
Cash dividends - Common	$50,000
Cash dividends - Preferred	$ 7,500
Less: Total dividends declared		$57,500
Closing balance of retained earnings		$79,120

Balance Sheet

As on May 31 , 2021

Assets :
Current assets :
Cash		$20,600
Accounts receivable		$15,300
Inventory		$70,220
Total current assets		$106,120
Non current assets :
Equipment	$420,000
Accumulated depreciation - Equipment	$(126,000)
Total non current assets		$294,000
Total assets		$ 400,120
Liabilities and shareholder's equity
Liabilities :
Current liabilities :
Accounts payable		$38,500
Dividends payable		$7,500
Total current liabilities		$46,000
Non current liabilities :
Note payable		$75,000
Total liabilities		$ 121,000
Shareholder's equity
Common shares		$50,000
Preferred shares		$150,000
Closing balance of retained earnings		$ 79,120
Total shareholder's equity		$ 279,120
Total liabilities and shareholder's equity		$ 400,120