Question

Problem 5-4A

Wolford Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company’s fiscal year on November 30, 2017, these accounts appeared in its adjusted trial balance.

Accounts Payable		$ 34,840
Accounts Receivable		22,360
Accumulated Depreciation—Equipment		88,400
Cash		10,400
Common Stock		45,500
Cost of Goods Sold		798,590
Freight-Out		8,060
Equipment		204,100
Depreciation Expense		17,550
Dividends		15,600
Gain on Disposal of Plant Assets		2,600
Income Tax Expense		13,000
Insurance Expense		11,700
Interest Expense		6,500
Inventory		34,060
Notes Payable		56,550
Prepaid Insurance		7,800
Advertising Expense		43,550
Rent Expense		44,200
Retained Earnings		18,460
Salaries and Wages Expense		152,100
Sales Revenue		1,175,200
Salaries and Wages Payable		7,800
Sales Returns and Allowances		26,000
Utilities Expense		13,780

Additional data: Notes payable are due in 2021.

Prepare a multiple-step income statement. (List other revenues before other expenses.)

WOLFORD DEPARTMENT STORE Income Statement choose the accounting period For the Year Ended November 30, 2017November 30, 2017For the Month Ended November 30, 2017
Select an opening name for section one DividendsNet Income / (Loss)Retained Earnings, December 1, 2011Retained Earnings, November 30, 2012SalesTotal RevenuesNet SalesGross ProfitOperating ExpensesTotal Operating ExpensesIncome From OperationsOther Revenues and GainsOther Expenses and LossesIncome Before Income Taxes

Prepare a retained earnings statement. (List items that increase retained earnings first.)

WOLFORD DEPARTMENT STORE Retained Earnings Statement choose the accounting period For the Month Ended November 30, 2017For the Year Ended November 30, 2017November 30, 2017
select an opening name DividendsExpensesNet Income / (Loss)Retained Earnings, December 1, 2016Retained Earnings, November 30, 2017Sales RevenuesTotal ExpensesTotal RevenuesNet SalesGross ProfitOperating ExpensesTotal Operating ExpensesIncome From OperationsOther Revenues and GainsOther Expenses and LossesIncome Before Income Taxes		$enter a dollar amount

Prepare a classified balance sheet. (List current assets in order of liquidity.)

WOLFORD DEPARTMENT STORE Balance Sheet choose the accounting period For the Year Ended November 30, 2017November 30, 2017For the Month Ended November 30, 2017
Assets
select an opening name for subsection one Current AssetsCurrent LiabilitiesExpensesIntangible AssetsLong-term InvestmentsLong-term LiabilitiesProperty, Plant and EquipmentRevenuesStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal ExpensesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term InvestmentsTotal Long-term LiabilitiesTotal Property, Plant and EquipmentTotal RevenuesTotal Stockholders' Equity

Calculate the profit margin and the gross profit rate. (Round answers to 1 decimal place, e.g. 15.2%)

Profit margin		enter Profit margin in percentages rounded to 1 decimal place	%
Gross profit rate		enter Gross profit rate in percentages rounded to 1 decimal place	%

The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $52,576 and expenses by $76,180. Compute the expected new net income. Then, compute the revised profit margin and gross profit rate. (Ignore income tax effects.)

Revised net income		$enter revised net income in dollars
Revised profit margin (Round to 1 decimal place, e.g. 15.2%)		enter Revised profit margin in percentages rounded to 1 decimal place	%
Revised gross profit rate (Round to 1 decimal place, e.g. 15.2%)		enter Revised gross profit rate in percentages rounded to 1 decimal place	%

Answer 1

1.

Sales :
Sales Revenue		1175200
Less: Sales Return and allowances		(26000)
Net sales		1149200
less: cost of goods sold		(798590)
Gross profit		350610
less: Operating Expenses:
Freight Out	8060
Depreciation Expense	17550
Insurance Expense	11700
Advertising expenses	43550
Rent Expense	44200
Salaries and wages expense	152100
Utilities Expense	13780
Total operating Expense		(290940)
Income from operations		59670
Add: Other Revenues and Gains :
Gain on Disposal of plant assets		2600
Less: other expenses and losses :
Interest expenses		(6500)
Income before income taxes		55770
Less: Income tax expenses		(13000)
Net income / (loss)		$42,770

2.

Retained Earnings Opening balance	18460
Add: Net income / (Loss)	42770
	61230
Less: Dividends	(15600)
Retained Earnings Closing balance	$45,630

3.

ASSETS
Current assets :
Cash	10400
Accounts receivable	22360
Inventory	34060
Prepaid insurance	7800
Total Currents assets		74620
Property, Plant and equipment :
Equipment	204100
Less: Accumulated Depreciation	(88400)	115700
Total Assets		$190,320
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts Payable	34840
Salary and wages payable	7800
Total Currents assets		42640
Long term liabilities :
Notes Payable		56550
Total Liabilities		99190
Stockholder's equity :
Common stock	45500
Retained Earnings	45630
Total stockholder's equity		91130
Total liabilities and stockholder's equity		$190,320

Profit Margin = Net income / Net sales

Net income = $42770, Net Sales = $1149200

Profit Margin = $ 42770/ $1149200

Profit Margin = 3.72%

Gross profit rate = Gross profit / Net sales

Gross profit= $350610 Net Sales = $1149200

Gross profit rate = Gross profit / Net sales

Gross profit rate = $350610 / $1149200

Gross profit rate = 30.51%

4. (a) To calculate the Revised net income:

Particulars	Amount($)
Gross profit ($350610 + $52576)	403186
Less: Total operating expenses ($290940 + $76180)	(367120)
Income from operations	36,066
Add: Other Revenues and Gains :
Gain on Disposal of plant assets	2600
Less: other expenses and losses :
Interest expenses	(6500)
Income before income taxes	32166
Less: Income tax expenses	(13000)
Net income / (loss)	$19,166

(b)

Net Sales ($1149200 x 115%) = $ 1,321,580

Profit Margin = Net income / Net sales

Net income = $ 19166, Net Sales = $ 1321580

Profit Margin = $ 19166/ $ 1321580

Profit Margin = 1.45%

(c)

Gross profit ($ 350610+$ 52576) = $403186

Gross profit rate = Gross profit / Net sales

Gross profit= $ 403186 Net Sales = $ 1321580

Gross profit rate = Gross profit / Net sales

Gross profit rate = $ 403186 / $1321580

Gross profit rate = 30.51%