Mitch Hopkins owns the Happy Valley Drug Store, which has prospered during its second year of operation. To help Hopkins decide whether to open another pharmacy in the area, his bookkeeper has prepared the current income statement of the business.

Hopkins recently read in an industry trade journal that a successful two-year-old pharmacy meets these criteria:
a. Gross margin is at least 50 percent.
b. Net income is at least $150,000.
Basing his opinion on the entity's income statement data, Hopkins believes the business meets both criteria. He plans to go ahead with the expansion plan, and asks your advice on preparing the pharmacy's income statement in accordance with generally accepted accounting principles. When you point out that the income statement includes errors, Hopkins assures you that all amounts are correct.
Required
Prepare a correct multi-step income statement, and make a recommendation about whether to undertake the expansion at this time.

Transcribed Image Text:

HAPPY VALLEY DRUG STORE Income Statement For the Year Ended December 31, 2014 Sales revenue $740,000 Interest revenue 30,000 Total revenue 770,000 348,000 Cost of goods sold Gross margin 422,000 Operating expenses: Salary expense $127,000 Rent expense 32,000 Amortization expense 24,500 Interest expense 10,500 Utilities expense 6,800 Supplies expense Total operating expenses Income from operations 4,000 204,800 217,200 Other revenues: Sales discounts ($11,000) and returns ($24,000) 35,000 Net income $252,200