Campbell Manufacturing Company (CMC) was started when it acquired $80,000 by issuing common stock. During the first

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Campbell Manufacturing Company (CMC) was started when it acquired $80,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $75,000. CMC also incurred $60,000 of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option 1 believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option 2 believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made 5,000 units of product and sold 4,000 units at a price of $35 each. All transactions were cash transactions.

Required

a. Prepare a GAAP-based income statement and balance sheet under each of the two options.

b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.

c. Assume that CMC provides an incentive bonus to the company president equal to 20 percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus.

d. Assume a 30 percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that minimizes the amount of the company's income tax expense.

e. Comment on the conflict of interest between the company president as determined in Requirement c and the owners of the company as indicated in Requirement d. Describe an incentive compensation plan that would avoid a conflict of interest between the president and the owners

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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Fundamental Managerial Accounting Concepts

ISBN: 978-1259569197

8th edition

Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds

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