1 Multistep Income Statement for the Year ended 12312014 2 C

1. Multi-step Income Statement for the Year ended 12/31/2014.

2. Comparative, Classified Balance Sheets as of 12/31/2013 and 12/31/2014.

2013 Transactions:

1. 7/1/13: Dumbo issues 8,000 shares of $2 par value Common Stock in return for $80,000 in cash.

2. 8/1/13: Dumbo pays for an insurance policy that covers the period 2/1/14 – 7/31/14. Dumbo pays the entire $4,200 amount in cash on 8/1/13.

3. 10/1/13: Dumbo signs a contract to rent a building for 12 months at a rate of $1,200 per month. The contract begins on 3/1/14. Dumbo makes an initial payment of $6,000 and will pay the remainder of the rental fees at the end of the contract (2/28/15).

4. 10/1/13: Dumbo signs an employment agreement with Jane Smith. Ms. Smith will begin working on 1/1/14, earning $180,000 per year. She will be paid on the 15th of each month for the prior month’s work (e.g., her first paycheck will be issued on February 15th, as payment for January’s services). [Assume all of these payments are made – they will not be shown explicitly in this list of transactions.]

5. 11/1/13: Dumbo buys (and receives) 4,800 cases of merchandise inventory for $252,000 on account.

6. 11/15/13: Dumbo receives $45,000 in cash from a customer for goods to be delivered in February 2014.

2014 Transactions:

1. 1/1/14: Dumbo buys $6,000 of office supplies on account.

2. 1/10/14: Dumbo pays $18,000 cash to the supplier from the 11/1/13 transaction.

3. 1/15/14: Dumbo signs a contract to rent a delivery van for $250/month. The rental period is 12 months and begins on 2/1/14. Payments for each month are made on the first of the month, starting on 2/1/14. [Assume all of these payments are made – they will not be shown explicitly in this list of transactions.]

4. 4/1/14: Dumbo returns $1,000 of office supplies to its supplier and pays the remainder of the balance of the 1/1/14 purchase in cash.

5. 5/1/14: Dumbo buys a piece of land for $45,000. Dumbo paid $45,000 in cash.

6. 6/1/14: The firm pays $3,000 in cash for advertising expenses, all of which relate to ads running in 2014.

7. 7/1/14: Dumbo arranges to buy a corporate jet for $200,000 and will take delivery in June of 2015. No cash is exchanged.

8. 8/1/14: Dumbo borrows $40,000 from the bank. This loan is in the form of a note that is due in two years (7/31/16) and bears interest at the rate of 6% per year. All of the interest and principal is due at the end of the note period.

9. 10/1/14: Dumbo receives a $10,000 deposit from a customer for goods to be delivered in February 2015.

Other Information:

10. The firm delivers goods with a sales price of $375,000 to customers during 2014, as contracted. This amount includes the goods ordered on 11/15/2013. The remaining goods were sold on account. The firm collects $257,000 of these sales during 2014 and expects to fully collect the remaining amount.

11. At 12/31/14, the firm takes a physical inventory and finds the following items on hand:

$1,500 of the office supplies purchased on 1/1/14.

$162,000 of the inventory purchased on 11/1/13

12. On December 31, 2014, the Board of Directors will declare a dividend payable to shareholders equal to 40% of the firm’s Net Income for 2014. The dividend will be paid in 2015. If the firm has a Net Loss for the period, the Board of Directors will not declare a dividend.

13. The firm pays taxes at a 35% tax rate. If taxes are owed, they will be paid in January 2015. If the firm has a pre-tax loss, assume that there are no taxes paid nor tax refunds received. (In other words, if there is a pre-tax loss, assume a 0% tax rate.)

Solution

Income Statement 31/12/2014 Sales     375,000.00 Opening Stock    252,000.00 Purchases        5,000.00 Closing Stock (163,500.00) Cost of Good Sold      93,500.00      (93,500.00) Gross Profit     281,500.00 General Administrative Expenses Salaries & Wages    180,000.00 Insurance Expense        4,200.00 Rent Expense      12,000.00 (196,200.00) Distribution Expenses Vehicle Rent        2,750.00 Advertising Exp        3,000.00       (5,750.00) Finance Expenses Interest Exp        1,000.00       (1,000.00) Operating Profit       78,550.00 Taxation @ 35%      (27,492.50) Net Income/Profit After Tax       51,057.50 Dividend      (20,423.00) Retained Profit       30,634.50 Balance Sheet:31/12/2013 Amount Non Current Asset                    -   Current Asset Cash & Bank 120,800.00 Advance Insurance Premium        4,200.00 Inventory 252,000.00 Total Asset 377,000.00                    -                      -   Equity & Reserves                    -   Share Capital      16,000.00 Share Premium      64,000.00     80,000.00 Non-Current Liabilities                    -   Current Liabilities Accounts Payable 252,000.00 Advance from customer      45,000.00 297,000.00 Total Equity & Liabilities 377,000.00 Balance Sheet:31/12/2014 Amount Non Current Asset Land             45,000.00             45,000.00 Current Asset                            -   Cash & Bank           189,050.00 Account Receivable             73,000.00 Advance Insurance Premium                            -   Inventory           163,500.00           425,550.00 Total Assets           470,550.00                            -   Equity & Reserves                            -   Share Capital             16,000.00 Share Premium             64,000.00 Retained Profit             30,634.50           110,634.50 Non-Current Liabilities                            -   Notes Payables             40,000.00             40,000.00 Current Liabilities                            -   Accounts Payable           240,000.00 Advance from customer             10,000.00 Rent Payable                6,000.00 Accrued Salary             15,000.00 Accrued Interest                1,000.00 Tax Payable             27,492.50 Dividend Payable             20,423.00           319,915.50 Total Equity & Liabilities           470,550.00