Toy Company

Income Statement

For the year ended December 31, 2015

Sales = $8,356,257

Cost of Goods Sold = $4,963,512

Gross Profit = $3,392,745

S & A Expenses = $1,426,856

Income before taxes = $1,965,889

Income Tax = $530,970

Net Income =$1,435,099

In addition, the following information is provided:

1. The company was having difficulty collecting several of their receivables. Therefore, the allowance for doubtful accounts has been increased from 1% to 2% of sales. The old bad debt expense rate was charged to S & A expenses.

2. Common shares outstanding at the end of 2014 totaled 420,000. There was no change in shares outstanding in 2015.

3. The controller also noted that the following items were not included in the above income statement: Obsolete inventory = $77,250 Long term stock investment had become permanently impaired for $126,800

4. An unusual and infrequent casualty of $163,600 was included in the S & A expenses.

5. Retained earnings as of 1/1/15 was $2,964,726. Cash dividends of $419,400 were paid on 6/15/15 and another $321,600 of dividends were declared on 12/29/15 (to be paid in January 2016.

6. In Jan. 2015, the company changed its method of accounting for plant assets from the straight-line to the double-declining balance method. The current year depreciation amount is included in the S & A expenses in the income statement as initially prepared:

2012:S-L method = $83,400; D-D method= $154,700

2013:S-L method = $83,400: D-D method= $120,400

2014: S-L method = $83,400: D-D method= $97,265

2015: S-L method = $111,600: D-D method= $171,850

7. The auditors discovered three errors during 2015 which have not been corrected:

First, when the physical inventory was taken at the end of 2013, one of the count sheets was not included. The ending inventory for 2013 was understated by $96,200. The 2014 and 2015 inventory was correctly recorded. The company uses the periodic inventory method.

Also, in 2014 the company failed to record $41,900 as an expense for sales commissions and instead recorded it in the 2015 income statement.

Finally, it was also discovered that a new piece of equipment purchased in 2014 for $86,400 was written off to repair expense (part of S & A). Had the equipment been properly recorded as a depreciable asset, the depreciation for straight-line and double declining balance would have been:

2014: S-L method = $17,280; D-D method = $34,560

2015: S-L method = $17,280; D-D method = $20,736

8. The income tax rate was 31% in 2012, 32% in 2013, and 27% for 2014 and 2015.

9. The company uses the periodic inventory method where all purchases of inventory are recorded in a purchases account rather than directly into inventory.

REQUIRED:

1. Prepare the 2015 multiple step income statement for Toy Company. Prepare a separate analysis to show the change in the S & A expenses from what was given to what they should be after corrections.

2. Prepare a statement of retained earnings for 2015.

3. Prepare any footnotes that are necessary

4. Identify the effect on balance sheet accounts for any of the items 1-8. What account is impacted and by how much? Then show the cumulative total of the individual effects.