Lowry Department Store is located in midtown Metropolis. During the past several
ID: 2362105 • Letter: L
Question
Lowry 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, 2010, these accounts appeared in its adjusted trial balance.Accounts Payable$ 23,300
Accounts Receivable17,200
Accumulated Depreciation—Delivery Equipment20,000
Accumulated Depreciation—Store Equipment38,000
Cash8,000
Common Stock35,000
Cost of Goods Sold633,300
Delivery Expense6,200
Delivery Equipment57,000
Depreciation Expense—Delivery Equipment4,000
Depreciation Expense—Store Equipment9,500
Dividends12,000
Gain on Sale of Equipment2,000
Income Tax Expense10,000
Insurance Expense9,000
Interest Expense5,000
Merchandise Inventory26,200
Notes Payable47,500
Prepaid Insurance6,000
Property Tax Expense3,500
Property Taxes Payable3,500
Rent Expense34,000
Retained Earnings14,200
Salaries Expense117,000
Sales904,000
Salaries Payable6,000
Sales Returns and Allowances20,000
Store Equipment105,000
Utilities Expense10,600
Additional data: Notes payable are due in 2014.
Hint: Prepare financial statements and calculate profitability ratios.
Instructions:
(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.
(a) Net income$ 43,900
Tot. assets$161,400
(b) Calculate the profit margin ratio and the gross profit rate.
(c) 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 using 20% of net sales. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $37,605 and operating expenses by $62,595. Compute the expected new net income. (Hint: You do not need to prepare an income statement). Then compute the revised profit margin ratio and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal.
Explanation / Answer
Income Statement: Revenues: Sales 1,067,624 Less; Sales Returns and Allowances 23,620 Gain on Sale of Equipment 2,362 Expenses: Cost of Goods Sold 747,927 Delivery Expense 7,322 Depreciation Expense – Delivery Equipment 4,724 Depreciation Expense – Store Equipment 11,220 Income Tax Expense 11,810 Insurance Expense 10,629 Interest Expense 5,905 Property Tax Expense 4,134 Rent Expense 40,154 Salaries Expense 138,177 Utilities Expense 12,519 Revenues - Expenses = Net Income Retained Earnings Statement: Balance Sheet Assets: Cash 9,448 Accounts Receivable 20,313 Prepaid Insurance 7,086 Merchandise Inventory 30,942 Delivery Equipment 67,317 Less: Accumulated Depreciation - Delivery Equipment 23,620 Store Equipment 124,005 Less: Accumulated Depreciation – Store Equipment 44,878 Liabilities: Accounts Payable $27,517 Property Taxes Payable 4,134 Salaries Payable 7,086 Notes Payable 56,098 Stockholders' Equity Common Stock 41,335 Retained Earnings 16,770 + Net Income Less: Dividends 14,172
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