Problem 14.3A Reconstructing an income statement to reflect proper accounting principles. LO 14-5, 14-6

Samuel Cox, owner of Cox Video Center, sent the income statement shown below to several of his creditors who had asked for financial statements. The business is a sole proprietorship that sells audio and other electronic equipment. One of the creditors looked over the income statement and reported that it did not conform to generally accepted accounting principles.

The following additional information was made available by Cox:

1. On January 1, 2019, accounts receivable from customers totaled $26,000. On December 31, 2019, the receivables totaled $32,300.
2. No effort has been made to charge off worthless accounts. An analysis shows that $2,150 of the accounts receivable on December 31, 2019, will never be collected.
3. The beginning and ending merchandise inventories were valued at their estimated selling price. The cost of the ending inventory is determined to be $47,800, and the cost of the beginning inventory is determined at $44,100.
4. On January 1, 2019, suppliers of merchandise were owed $38,500, while on December 31, 2019, these debts were $44,725.
5. The owner paid himself a salary of $2,950 per month from the funds of the business and charged this amount to an account called Salary of Owner.
6. The owner also withdrew cash from the firms bank account to pay himself $5,250 interest on his capital investment. This amount was charged to Interest Expense.
7. A check for $7,300 to cover the owners personal income tax for the previous year was issued from the firms bank account. This was charged to Income Tax of Owner.
8. Depreciation on assets was computed at 8 percent of the gross profit. An analysis of assets showed that the original cost of the equipment and fixtures was $62,400. Their estimated useful life is 12 years with no salvage value. The building cost $148,750. Its useful life is expected to be 25 years with no salvage value.
9. Included in Repairs Expense was $6,950 paid on December 22 for a new parking lot completed that day.
10. The increase in land value was based on an appraisal by a qualified real estate appraiser.

Required: Prepare an income statement in accordance with generally accepted accounting principles. Analyze: What is the gross profit percentage based on the income statement you prepared?

Income Statement December 31, 2019 Cash collected from Customers Cost of Goods Sold Merchandise Inventory, Jan. 1 Payments to Suppliers $694,000 $ 80,500 443,500 524,000 90,500 433,500 260,500 Less Merchandise Inventory, Dec. 31 Cost of Goods Sold Gross Profit on Sales Operating Expenses Salaries of Employees Salary of Owner Office Expense Depreciation Expense Income Tax of Owner Payroll Taxes Expense Advertising and other selling Expenses Repairs Expense Insurance Expense Interest Expense Utility and Telephone Expense Legal and Audit Expense Miscellaneous Expense Total Expenses Net Loss from Operations Increase in Appraised value of Land During Year Net Income $ 79,800 35,400 30,300 20,840 7,300 8,300 22,200 11,300 3,700 11,300 17,800 2,800 27,800 278,840 (18,340) 21,000 $ 2,660