Question

Benson Manufacturing Company (CMC) was started when it acquired $95,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $73,500. CMC also incurred $63,700 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made 4,900 units of product and sold 4,300 units at a price of $35.00 each. All transactions were cash transactions. Required a-1. Prepare an income statement and balance sheet under option 1. a-2. Prepare an income statement and balance sheet under option 2. b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors. c. Assume that CMC provides an incentive bonus to the company president equal to 13 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus. d. Assume a 40 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that minimizes the amount of the company's income tax expense. Complete this question by entering your answer in the tabs below. Required A1 Inc Stmt Required A1 Bal Required A2 Inc Stmt Required A2 Bal Required B Required C Required D Prepare a balance sheet for Option 1. BENSON MANUFACTURING COMPANY Balance Sheet Assets Cash Finished goods inventory 0 Total assets Equity Common stock Retained earnings Total equity $ < Prev 8 of 8 1 Next >

Answer 1

a-1

Income Statement
Sales Revenue	$      150,500
Cost of Goods Sold	$         64,500
Gross Profit	$         86,000
Selling and administrative expenses	$         63,700
Net Income	$         22,300
Balance Sheet
Assets
Cash	$      108,300
Finished Goods Inventory	$           9,000
Total Assets	$      117,300
Equity
Common Stock	$         95,000
Retained Earnings	$         22,300
Total Equity	$      117,300

a-2

Income Statement
Sales Revenue	$      150,500
Cost of Goods Sold	$      120,400
Gross Profit	$         30,100
Selling and administrative expenses	$                 -
Net Income	$         30,100
Balance Sheet
Assets
Cash	$      108,300
Finished Goods Inventory	$         16,800
Total Assets	$      125,100
Equity
Common Stock	$         95,000
Retained Earnings	$         30,100
Total Equity	$      125,100

b. Option 2 will leave favorable impression since it gives highest net income.

c.

	Option 1	Option 2
Net Income	$         22,300	$           30,100
Bonus @13%	$           2,899	$             3,913

Option 2 provides higher bonus

d.

	Option 1	Option 2
Net Income	$         22,300	$           30,100
Income Tax @40%	$           8,920	$           12,040

Option 1 minimzes income tax expense

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