P5-6        Comprehensive: Income Statement and Retained Earnings  The following selected accounts are taken from the Crandle  Corporation’s  December  31,  2007  adjusted  trial  balance:

 

Retained earnings, January 1, 2007	$428,900	Office supplies expense	$  1,800
Interest expense	4,900	Transportation-out (deliveries)	6,000
Depreciation expense: sales fixtures	8,500	Cost of goods sold	191,200
Sales returns and allowances	11,300	Sales discounts taken	5,200
Advertising expense	14,100	Bad debt expense	1,900
Common stock, $10 par	110,000	Sales supplies expense	4,600
Administrative and office salaries expense	29,500	Sales salaries expense	16,500
Dividend revenue	900	Depreciation expense: buildings and	Â
Sales	378,000	office equipment	10,000
Property tax expense	7,700	Income tax expense	15,870
Gain on sale of sales fixtures (pretax)	5,000	Â	Â

In addition to the preceding account balances, you have available the following information:

1.      In the middle of December 2007 the company incurred a material $5,500 pretax loss as a result of a freak flood of a river that had never flooded before.

2.      While making its December 31, 2007 adjusting entries, the company discovered the following:

a.    In recording its December 31, 2006 adjusting entries, it had inadvertently recorded depreciation expense twice for the same asset. The amount of the error was $4,000 pretax and is considered material. The error did not have any effect upon the depreciation recorded for 2007.

b.   Based on an analysis of the company’s recent favorable experience with uncollectible accounts receivable, the company decided to reduce the percentage used in computing bad debt expense. The use of the new percentage resulted in the

$1,900 bad debt expense being $500 less than the amount that would have been calculated using the old percentage.

3.      On April 1, 2007 the company sold Division M (a component of the company), which had been unprofitable for several years. For the first 3 months of 2007, Division M had incurred a pretax operating loss of $8,800. Division M was sold at a pretax loss of $7,500.

4.      The company paid cash dividends of $0.90 per share on its common stock. All the stock was outstanding for the entire year.

5.      The company is subject to a 30% income tax rate. The $15,870 Income Tax Expense account balance consists of $21,210 tax on income from continuing operations and $1,200 tax on the depreciation correction, and tax credits of $2,640 on the operating loss of Division M, $2,250 on the loss from sale of Division M, and $1,650 on the loss because of the flood.

 

Required

1.      As supporting documents for Requirement 2, prepare separate schedules for selling expenses and for general and admin- istrative expenses (include each depreciation expense where applicable in these schedules).

2.      Prepare a 2007 single-step income statement for the Crandle Corporation. Include any related note to the financial statements.

3.      Prepare a 2007 retained earnings statement.

4.      What was Crandle Corporation’s profit margin for 2007? What is your evaluation of Crandle’s 2007 profit margin if last year it was 8%?