Question

The financial records of Manchester Corporation were destroyed by fire at the end of 2017. Fortunately, the controller had kept the following statistical data related to the income statement and the balance sheet in addition to the published balance sheet of the year 2017:

• The beginning merchandise inventory was $92,000 and decreased 20% during the current year.
• Sales discounts amount to $17,000.
• Interest expense was $20,000.
• The income tax is $106,000.
• Cost of goods sold amounts to $500,000.
• Administrative expenses are 18% of cost of goods sold but only 8% of gross sales.
• 4/5 of the operating expenses relate to sales activities.

During the year 2018, the company had the following transactions.                                           

1. Manchester Corporation sold part of its investment portfolio for $15,000 and this transaction resulted in a gain of $3,400 for the firm. The company classifies its investments as non-trading equity.
2. A tract of land was purchased for $18,000 cash.
3. Long-term notes payable in the amount of $16,000 were retired before maturity by paying $16,000 cash.
4. An additional $20,000 in ordinary shares were issued at par.
5. Dividends totaling $8,200 were declared and paid to shareholders.
6. Depreciation expense of year 2018 is $11,000.
7. Land was purchased through the issuance of $30,000 in bonds.
8. At December 31, 2018, Cash was $32,000, Accounts Receivable (net) was $41,600, and Accounts Payable remained at $30,000.

                                                                                     

The financial position statement of the year 2017.

                                                                                                                                                       

Manchester Corporation Statement of Financial Position December 31, 2017
Assets
Investments	32,000
Equipment assets (net)	81,000
Land	40,000
Accounts receivables (net)	21,200
Cash	20,000
Totals	194,200
Equity & Liabilities
Share capital-Ordinary	32,000
Retained earnings	81,000
Long-term notes payable	40,000
Accounts payable	21,200
Totals	194,200

Instructions:                                                                                                                                   

1. Prepare an Income statement for 2018 and EPS.
2. Prepare a retained earnings statement for 2018.
3. Prepare a statement of financial position as it would appear at December 31, 2018.
4. Prepare a statement of cash flows for 2018.
5. Critically evaluate the rationale for the statement of financial position; income statement; and statement of cash flow.
6. What is the indication for EPS?

Answer 1

A)

Sales	1108000
Less : Cost of Sales	-511000
Gross Profit	597000
Less : Office and Administration	-90000
Less : Selling and Distribution	-72000
Add : Other income	3400
Net Profit before interest and tax	438400
Less : Interest expense	-20000
Net Profit before tax	418400
Less : Tax expense	-106000
Net Profit after tax	312400

Cost of sales = 500000+11000 depreciation

Sales = 90000/0.18 - 17000 discount

Office and Administration = 500000*18%=90000

Selling and distribution = 4/5 * 90000=72000

Other income = 3400 (gain on sale of investment)

B)

Dividends are paid out of retained earnings and hence reduce the retained earnings

Retained Earnings
Opening balance	81000
Add : Net profit for period	312400
Less : Dividend paid	-8200
Closing balance	385200

.