During its first year, Correia Merchandising had sales of $350,000, a cost of go
ID: 2494313 • Letter: D
Question
During its first year, Correia Merchandising had sales of $350,000, a cost of goods sold of $180,000, and operating expenses (not including depreciation) of $100,000. The company estimates its income taxes expense will be approximately 35% of income before taxes. The company's equipment, all of which was purchased on June 1, cost $95,000, with an estimated residual or salvage value of $5,000, and a useful life of five years. Assuming that Correia Merchandising uses the double-declining-balance depreciation method, calculate the company's gross profit for its first year ended May 31.
Explanation / Answer
Gross profit calculation
-----------------------------------
Sales $350,000
less:-cost of goods sold $180,000
operating expenses $100,000
Depreciation - 40% * $ 38,000
--------------- $ 318,000
------------------
Profit before tax $ 32,000
Income-tax 35% of $32,000 $ 11,200
Gross Profit $ 20,800
*Depreciation calculation
cost = 95000 ; salvage value =$5000 ; no of useful life= 5 years
Depreciation = cost-salvage value / no of years / cost - salvage value x 100 x 2
=$95000-$5000 / 5/$90000x100x2
= $90000/5/$90000x100x2
= $18000 / $90000 x100 x2
= 0.2x100 x2
= 40%
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