Lambert Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company’s fiscal year on November 30, 2014, these accounts appeared in its adjusted trial balance.

Accounts Payable $ 26,800 Accounts Receivable 17,200 Accumulated Depreciation—Equipment 68,000 Cash 8,000 Common Stock 35,000 Cost of Goods Sold 614,300 Freight-Out 6,200 Equipment 157,000 Depreciation Expense 13,500 Dividends 12,000 Gain on Disposal of Plant Assets 2,000 Income Tax Expense 10,000 Insurance Expense 9,000 Interest Expense 5,000 Inventory 26,200 Notes Payable 43,500 Prepaid Insurance 6,000 Advertising Expense 33,500 Rent Expense 34,000 Retained Earnings 14,200 Salaries and Wages Expense 117,000 Sales Revenue 904,000 Salaries and Wages Payable 6,000 Sales Returns and Allowances 20,000 Utilities Expense 10,600 Additional data: Notes payable are due in 2018.

Instructions

(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.

(b) Calculate the profit margin and the gross profit rate.

(c) The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%.

As a result, they estimate that gross profit will increase by $40,443 and expenses by $58,600. Compute the expected new net income. (Hint: You do not need to prepare an income statement.) Then, compute the revised profit margin and gross profit rate.

Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)

AppendixLO1