Comprehensive: Income Statement and Retained Earnings The following selected accounts are taken from the Crandle Corporation’s December 31, 2007 adjusted trial balance:
|
Retained earnings, January 1, 2007 |
$428,900 |
|
Interest expense |
4,900 |
|
Depreciation expense: sales fixtures |
8,500 |
|
Sales returns and allowances |
11,300 |
|
Advertising expense |
14,100 |
|
Common stock, $10 par |
110,000 |
|
Administrative and office salaries expense |
29,500 |
|
Dividend revenue |
900 |
|
Sales |
378,000 |
|
Property tax expense |
7,700 |
|
Gain on sale of sales fixtures (pretax) |
5,000 |
|
Office supplies expense |
$1,800 |
|
Transportation out (deliveries) |
6,000 |
|
Cost of goods sold |
191,200 |
|
Sales discounts taken |
5,200 |
|
Bad debt expense |
1,900 |
|
Sales supplies expense |
4,600 |
|
Sales salaries expense |
16,500 |
|
Depreciation expense: buildings and office equipment |
10,000 |
|
Income tax expense |
15,870 |
In addition to the preceding account balances, you have available the following information:
1. In the middle of December 2007 the company incurred a material $5,500 pretax loss as a result of a freak flood of a river that had never flooded before.
2. While making its December 31, 2007 adjusting entries, the company discovered the following:
a. In recording its December 31, 2006 adjusting entries, it had inadvertently recorded depreciation expense twice for the same asset. The amount of the error was $4,000 pretax and is considered material. The error did not have any effect upon the depreciation recorded for 2007.
b. Based on an analysis of the company’s recent favorable experience with uncollectible accounts receivable, the company decided to reduce the percentage used in computing bad debt expense. The use of the new percentage resulted in the $1,900 bad debt expense being $500 less than the amount that would have been calculated using the old percentage.
3. On April 1, 2007 the company sold Division M (a component of the company), which had been unprofitable for several years. For the first 3 months of 2007, Division M had incurred a pretax operating loss of $8,800. Division M was sold at a pretax loss of $7,500.
4. The company paid cash dividends of $0.90 per share on its common stock. All the stock was outstanding for the entire year.
5. The company is subject to a 30% income tax rate. The $15,870 Income Tax Expense account balance consists of $21,210 tax on income from continuing operations and $1,200 tax on the depreciation correction, and tax credits of $2,640 on the operating loss of Division M, $2,250 on the loss from sale of Division M, and $1,650 on the loss because of the flood.
Required
1. As supporting documents for Requirement 2, prepare separate schedules for selling expenses and for general and administrative expenses (include each depreciation expense where applicable in these schedules).
2. Prepare a 2007 single step income statement for the Crandle Corporation. Include any related note to the financial statements.
3. Prepare a 2007 retained earnings statement.
4. What was Crandle Corporation’s profit margin for 2007? What is your evaluation of Crandle’s 2007 profit margin if last year it was 8%?