Parker Department Store is located near the Mark Twain Shopping Mall. At the end of the company’s fiscal year on December 31, 2014, the following accounts appeared in its adjusted trial balance.

Accounts Payable $ 73,300 Accounts Receivable 43,500 Accumulated Depreciation—Buildings 52,500 Accumulated Depreciation—Equipment 42,600 Buildings 140,000 Cash 30,000 Common Stock 140,000 Cost of Goods Sold 412,000 Depreciation Expense 23,400 Dividends 15,000 Equipment 100,000 Gain on Disposal of Plant Assets 4,300 Income Tax Expense 15,000 Insurance Expense 8,400 Interest Expense 7,000 Interest Payable 2,000 Inventory 43,000 Land 50,000 Mortgage Payable 62,500 Prepaid Insurance 2,400 Maintenance and Repairs Expense 6,200 Retained Earnings 19,200 Salaries and Wages Expense 111,000 Sales Revenue 626,000 Salaries and Wages Payable 3,500 Sales Returns and Allowances 8,000 Utilities Expense 11,000 Additional data: $20,000 of the mortgage payable is due for payment next year.

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 25%.

As a result, they estimate that gross profit will increase by $50,500 and expenses by

$27,800. 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 the ratios, and evaluate the merit of this proposal.

AppendixLO1