The income statement for 2006 and balance sheet on December 31, 2006 for Shahruz
ID: 2589212 • Letter: T
Question
The income statement for 2006 and balance sheet on December 31, 2006
for Shahruz Pinole Co. appear below:
Shahruz Pinole Co.
Income Statement
For the Year Ended December 31, 2006
Sales $400,000
Cost of sales 250,000
Gross profit 150,000
Operating expenses 50,000
Net income 100,000
Shahruz Pinole Co.
Balance Sheet
December 31, 2006
Assets Liabilities and Stockholders' Equity
Cash $70,000 Notes payable $30,000
Accounts receivable (net) 50,000 Accounts payable 60,000
Inventory 80,000 Paid-in capital 410,000
Land 500,000 Retained earnings 200,000
Total liabilities and
Total assets $700,000 stockholders' equity $700,000
Additional information:
1. The general price indexes for selected dates are given below January 1, 2003 105 June 30, 2005 120 December 31 2006 140 Average for 2006 130
2. The company was founded on January 1, 2003. All capital stock was issued at that time
3. One-half of the land was acquired on January 1, 2003. The other one-half was acquired on June 30,2005.
4. The purchasing power loss for 2006 is $10,000
5. Ending inventory consists of units purchased uniformly in 2006
6. There was no beginning inventory for 2006. Cost of sales consists of the units purchased uniformly throughout 2006
Required:
(1) Prepare a constant dollar income statement for Shahruz Pinole Co. for the year ended December 31, 2006
(2) Prepare a constant dollar balance sheet for Shahruz Pinole Co. on December 31, 2006. (Hint: Retained earning is balancing item.)
Explanation / Answer
1. Constant Dollar Income Statement
Particulars
Amount
Calculation
Sales
430,770
400,000 / 130 x 140
Cost of Sales
(269,230)
250,000 / 130 x 140
Gross Profit
161,540
Operating Expenses
53,846
50,000 / 130 x 140
Net Income
107,694
Less: Purchasing Power Loss
(10,000)
Given in question
Constant Dollar Income
97,694
NOTE 1: Sales is assumed to spread evenly throughout the year and therefore, it is restated from average rate to year end inflation rate on Dec 31.
Note 2: Cost of sales is given to spread evenly throughout the year and therefore it is restated from average index of 130 in Dec to year end index of 140.
Note 3: Operating Expenses is assumed to spread evenly throughout the year and therefore it is restated from average index of 130 in Dec to year end index of 140.
Note 4: Purchasing power loss is the loss of monetary items like cash.
2. Constant Dollar Balance sheet
Calculation of Constant dollar assets in balance sheet
Assets
Amount
Calculation
Cash
70,000
Same as balance sheet
Accounts Receivable
53,846
50,000 / 130 x 140
Inventory
86,154
80,000 / 130 x 140
Land
625,000
One Half – 250,000 / 105 x 140
Other Half – 250,000 / 120 x 140
Total Assets
835,000
NOTE 5: Cash account is assumed to be adjusted by purchasing power loss and hence will be same.
Note 6: Accounts Receivable is assumed to occur evenly throughout the year as the sales are spread evenly. Average rate is restated to closing index rates.
Note 7: Closing Inventory includes evenly purchases made during the year only and therefore, average index is restated to closing index.
Note 8: One half of land was purchased in Jan 2003 and therefore it restated from Jan 2003 index to dec 2006 index. Other half of land was purchased on 30th June 2005 and therefore, index of June 30 2005 is restated to Dec 31 2006 index rates.
Calculation of Constant dollar liabilities in balance sheet
Liabilities
Amount
Calculation
Notes Payable
32,308
30,000 / 130 x 140
Accounts Payable
64,615
60,000 / 130 x 140
Paid in capital
546,667
410,000 / 105 x 140
Retained Earnings (Balancing Figure)
191,410
Since no information regarding retained earnings is given, it is assumed to be balancing figure.
Total
835,000
Balance Sheet
Assets
Amount
Liabilities
Amount
Cash
70,000
Notes Payable
32,308
Accounts Receivable
53,846
Accounts Payable
64,615
Inventory
86,154
Paid in capital
546,667
Land
625,000
Retained Earnings (Balancing Figure)
191,410
Total Assets
835,000
Total
835,000
Particulars
Amount
Calculation
Sales
430,770
400,000 / 130 x 140
Cost of Sales
(269,230)
250,000 / 130 x 140
Gross Profit
161,540
Operating Expenses
53,846
50,000 / 130 x 140
Net Income
107,694
Less: Purchasing Power Loss
(10,000)
Given in question
Constant Dollar Income
97,694
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