Question

Samuel Cox, owner of Cox Video Center, sent the income statement shown below to several of his creditors who had asked for financial statements. The business is a sole proprietorship that sells audio and other electronic equipment. One of the creditors looked over the income statement and reported that it did not conform to generally accepted accounting principles.

Cox Video Center Income Statement

December 31, 2019

Cash Collected from Customers $ 698,000

Cost of Goods Sold

Merchandise Inventory, Jan. 1 $ 76,500

Payments to Suppliers 439,500 516,000

Less Merchandise Inventory, Dec. 31 86,500

Cost of Goods Sold 429,500

Gross Profit on Sales 268,500

Operating Expenses

Salaries of Employees $ 81,400

Salary of Owner 30,600

Office Expense 31,900

Depreciation Expense 21,480

Income Tax of Owner 8,900

Payroll Taxes Expense 9,900

Advertising and Other Selling Expenses 23,800

Repairs Expense 12,900

Insurance Expense 5,300

Interest Expense 12,900

Utility and Telephone Expense 19,400

Legal and Audit Expense 4,400

Miscellaneous Expense 29,400

Total Expenses 292,280

Net Loss from Operations (23,780 )

Increase in Appraised Value of Land During Year 26,000

Net Income $ 2,220

The following additional information was made available by Cox:

A.On January 1, 2019, accounts receivable from customers totaled $27,600. On December 31, 2019, the receivables totaled $33,900.

B.No effort has been made to charge off worthless accounts. An analysis shows that $1,750 of the accounts receivable on December 31, 2019, will never be collected.

C.The beginning and ending merchandise inventories were valued at their estimated selling price. The cost of the ending inventory is determined to be $49,400, and the cost of the beginning inventory is determined at $45,700.

D.On January 1, 2019, suppliers of merchandise were owed $40,100, while on December 31, 2019, these debts were $46,325. The owner paid himself a salary of $2,550 per month from the funds of the business and charged this amount to an account called Salary of Owner.

E.T he owner also withdrew cash from the firm’s bank account to pay himself $4,850 interest on his capital investment. This amount was charged to Interest Expense.

F. A check for $8,900 to cover the owner’s personal income tax for the previous year was issued from the firm’s bank account. This was charged to Income Tax of Owner.

G.Depreciation on assets was computed at 8 percent of the gross profit. An analysis of assets showed that the original cost of the equipment and fixtures was $67,200. Their estimated useful life is 12 years with no salvage value. The building cost $152,500. Its useful life is expected to be 25 years with no salvage value.

H. Included in Repairs Expense was $6,550 paid on December 22 for a new parking lot completed that day.

I. The increase in land value was based on an appraisal by a qualified real estate appraiser.

Required: Prepare an income statement in accordance with generally accepted accounting principles.

Analyze: What is the gross profit percentage based on the income statement you prepared?

Answer 1

Cox Video Center
Income Statement
Year Ended December 31, 2019
Particulars	Amount	Amount
Sales (cash & Credit)-(698000+6300)		704300
Cost of Goods Sold
Opening Inventory	45700
Add: Purchase during the period	445725
Less: Closing Inventory	49400
Cost of Goods Sold		442025
Gross Profit		262275
Operating Expenses
Salaries of Employees	$81,400
Office Expenses	31900
Depreciation Expenses	11700
Income tax of owner	8900
Payroll Taxes expenses	9900
Advertising and other selling expenses	23800
Repair expenses	6350
Insurance expenses	5300
Interest expenses	12900
Utility and telephone expenses	19400
Legal and audit expenses	4400
Bad Debts	1750
Miscellaneous expenses	29400
Total Operating Expenses		$247,100
Net Profit from Operation		$15,175
Notes:
1 Sales = Cash collected from customer-Opening Accounts receivables+Closing accounts receivables
$698000-27600+33900
$704,300
2. Purchase = Payments to suppliers-Opening accounts payable+closing accounts payable
$439500-40100+46325
$445,725
3. Owner's Salary/drawings does not form a part of Income statement. It get deducted from owners capital Investment appears in balance sheet
4. Depreciation Expenses
Depreciation on Equipment = cost/number of years
67200/12
5600
Depreciation on Building = 152500/25
6100
Total Depreciation expenses = 5600+6100
11700
5. In Sole proprietorship, there is no need to file separate return for business, owner show profit from business in his personal income tax return, and pay the taxes accordingly. Thus, taxes paid for business are shown in income statement.
6. Repair expenses include $6550 paid for parking lot completed on Dec 22. Parking lot is a part of land improvement.Thus, it will not come under repair expenses.
7. Interest expenses paid to owner on Capital investment is allowed.
8.Bad debts to be charged off for uncollectable accounts receivables
Gross Profit %	GP/Sales*100
	262275/704300*100
	37.23%