Thornton Manufacturing Company (CMC) was started when it acquired $92,000 by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs (materials, labor, and overhead) amounting to $53,300. CMC also incurred $65,600 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 4,100 units of product and sold 3,400 units at a price of $39.00 each. All transactions were cash transactions.

JFZ Note: This question reflects both your Connect HW assign (from pg 56) and the Pg 19-21 "Motive to Manipulate" example found in your textbook (and discussed in my video). Required

1. a-1. Prepare an income statement and balance sheet under option 1.

2. a-2. Prepare an income statement and balance sheet under option 2.

3. b. Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.

4. c. Assume that CMC provides an incentive bonus to the company president equal to 10 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.

5. d. Assume a 40 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 companys income tax expense.