Problem 1-27A (Algo) Importance of cost classification LO 1-3, 1-6 Finch Manufacturing Company (CMC) was started when it acquired $98,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $58,500. CMC also incurred $81,000 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 4,500 units of product and sold 3,500 units at a price of $38.00 each. All transactions were cash transactions. Required a-1. Prepare an income statement and balance sheet under option 1. a-2. Prepare an income statement and balance sheet under option 2. 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 13 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. Complete this questi by entering your answer in the tabs below. Req A1 Inc Stmt Req A1 Bal Sheet Req A2 Inc Stmt Req A2 Bal Sheet Req B Reqc Req D Prepare a GAAP-based income statement for Option 1. FINCH MANUFACTURING COMPANY Complete this question by entering your answer in the tabs below. Req A1 Inc Stmt Req A1 Bal Sheet Req A2 Inc Stmt Req A2 Bal Sheet Req B Reqc Reg D Prepare a GAAP-based income statement for Option 1. FINCH MANUFACTURING COMPANY Income Statement 0 $ 0 Complete this question by entering your answer in the tabs below. Req A1 Inc Stmt Req A1 Bal Sheet Req A2 Inc Stmt Req A2 Bal Sheet Req B Reqc Reg D Prepare a GAAP-based income statement for Option 2. FINCH MANUFACTURING COMPANY Income Statement 0 $ 0 Complete this question by entering your answer in the tabs below. Req A1 Inc Req A1 Bal Sheet Req A2 Inc Stmt Req A2 Bal Sheet Stmt Req Reqc Req D Prepare a balance sheet for Option 2. FINCH MANUFACTURING COMPANY Balance Sheet Assets Total assets 0 Equity Total equity 0 Complete this question by entering your answer in the tabs below. Req A1 Inc Stmt Req A1 Bal Sheet Req A2 Inc Stmt Req A2 Bal Sheet Req B Reqc Req D Assume that CMC provides an incentive bonus to the company president equal to 13 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. (Round your answers to the nearest whole dollar.) Option no. 1 bonus Option no. 2 bonus The option that provides the president with the higher bonus Complete this question by entering your answer in the tabs below. Req A1 Inc Stmt Req A1 Bal Sheet Req A2 Inc Stmt Req A2 Bal Sheet Req B Reqc Req 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. (Round your answers to the nearest whole dollar.) Option no. 1 income tax expense Option no. 2 income tax expense The option that minimizes the amount of the company's income tax expense
