Reconstructing the income statement and balance sheet. Computer Needs, Inc., operates a retail store that sells computer hardware and software. It began operations on January 2, Year 8, and operated successfully during its first year, generating net income of \(\$ 8,710\) and ending the year with \(\$ 15,600\) in its bank account. Exhibit 3.25 presents an income statement for Year 8, and Exhibit 3.26 presents a balance sheet as of the end of Year 8 .

As Year 9 progressed, the owners and managers of Computer Needs, Inc., felt that they were doing even better. Sales seemed to be running ahead of Year 8, and customers were always in the store. Unfortunately, a freak lightning storm hit the store on December 31, Year 9, and completely destroyed the computer on which Computer

Needs, Inc., kept its records. It now faces the dilemma of figuring how much income it generated during Year 9 in order to assess its operating performance and figure out how much income taxes it owes for the year.
You are asked to prepare an income statement for Year 9 and a balance sheet at the end of Year 9. To assist in this effort, you obtain the following information.
(1) The bank at which Computer Needs, Inc., maintains its account provided a summary of the transactions during Year 9, as shown in Exhibit 3.27.
(2) Collections received during January, Year 10, from third-party credit card companies and from customers for sales made during Year 9 totaled \(\$ 40,300\). This is your best estimate of accounts receivable outstanding on December 31, Year 9 .
(3) A physical inventory of merchandise was taken on January 1, Year 10. Using current catalogs from suppliers, you estimate that the merchandise has an approximate cost of \(\$ 60,700\).
(4) Computer Needs, Inc., had paid its annual insurance premium on October 1, Year 9 (included in the amounts in Exhibit 3.27). You learn that \(\$ 1,800\) of the insurance premium applies to coverage during Year 10.
(5) Based on depreciation claimed during Year 8 and new equipment purchased during Year 9 , you approximate that depreciation expense for Year 9 was \(\$ 3,300\).
(6) Bills received from merchandise suppliers during January, Year 10, totaled \(\$ 45,300\). This is your best estimate of accounts payable outstanding to these suppliers on December 31, Year 9.
(7) Other Current Liabilities represent amounts payable to employees and other providers of selling and administrative services. Other Current Liabilities as of December 31, Year 9, total \(\$ 1,200\).

a. Prepare an income statement for Computer Needs, Inc., for Year 9 and a balance sheet on December 31, Year 9. The income tax rate is 28 percent. (Hint: Set up \(\mathrm{T}\)-accounts, enter the balance sheet amounts on December 31, Year 8, and then enter the information in items (1) to (7) above.)

b. How well did Computer Needs, Inc., perform during Year 9?

Transcribed Image Text:

EXHIBIT 3.25 COMPUTER NEEDS, INC. Income Statement For the Year Ended December 31, Year 8 (Problem 39) Sales Cost of Goods Sold Selling and Administrative Expenses Depreciation Interest Income Taxes Net Income $152,700 (116,400) (17,400) (2,800) (4,000) (3,390) $ 8,710