Presented below selected ledger accounts of Sage Corporation as of December 31, 2017.
Cash
Administrative expenses
Selling expenses
het sales
Cost of goods sold
Cash dividends declared (2017)
Discontinued operations (loes before income taxes)
Cash dividende paid (2017)
Depreciation expense, not recorded in 2010
Retained earnings, December 31, 2016
Effective tax rate 30%
$51,400
107,500
80,940
557,500
268,200
24,650
23,600
40,700
31,400
The Correct Answer and Explanation is :
To answer this question, we’ll need to calculate the net income for Sage Corporation, considering the provided information, and explain how each account fits into the process. Here’s a breakdown of the key steps and accounts involved:
1. Sales Revenue
- Sales: $557,500
Sales revenue is the total income generated from selling goods or services. This figure will be used as the starting point in the income statement.
2. Cost of Goods Sold (COGS)
- COGS: $268,200
COGS represents the direct costs of producing the goods that were sold during the year. Subtracting this from sales gives the gross profit.
3. Operating Expenses
- Administrative expenses: $107,500
- Selling expenses: $80,940
These are the operating expenses associated with running the company, including costs for management, selling, and marketing. Together, these expenses total $188,440.
4. Discontinued Operations
- Discontinued operations (loss before taxes): $23,600
This represents a loss from operations that have been discontinued, meaning that they will not continue to affect future operations.
5. Depreciation Expense
- Depreciation expense not recorded in 2010: $31,400
This is an expense related to the wear and tear of tangible assets like machinery or buildings. It needs to be added as part of the cost, as it should have been recognized earlier.
6. Tax Consideration
The effective tax rate is 30%, so we will calculate the tax implications of each component after calculating the taxable income.
7. Dividends
- Cash dividends declared (2017): $24,650
- Cash dividends paid (2017): $40,700
While dividends don’t affect net income directly, they impact the cash flow and retained earnings.
8. Retained Earnings (beginning of year)
- Retained earnings, December 31, 2016: This is needed for calculating the final retained earnings, but it’s not directly used in net income calculation.
Income Calculation
Net income is calculated as follows:
- Sales – COGS = Gross Profit
- Gross Profit – Operating Expenses = Operating Income
- Operating Income – Loss from Discontinued Operations = Pre-tax Income
- Pre-tax Income – Depreciation Expense = Taxable Income
- Taxable Income × (1 – tax rate) = Net Income
Key Adjustments
The tax effect is 30%, so the income tax will be subtracted after calculating the pre-tax income. If depreciation was not recorded in 2010, it needs to be added back into the total expenses for the year.
This is a simplified version, and a more precise breakdown could be done by adjusting the detailed accounts, but the above framework gives the core logic for computing the net income of Sage Corporation for 2017.