Use the following information to answer Q7a, Q7b, Q7c & Q7d You are the new owner of Kent Co. The company, which was formed in January 2018, has equipment with historic cost of $300,000 being depreciated on a straight-line basis over 5 years. You took over at the end of 2018 and appointed your cousin Natalia, to manage the company. You promise Natalia a bonus of $5,00 if net income is increased by 10% in 2019. At the end of 2019, Natalia presents you with a copy of the income statement. Natalia points out that both sales and net income are up by 10% and asks for the $5,000 bonus.

2018 2019 Sales $1,000,000 $1,100,000 CGS 650,000 726,000 Gross margin 350,000 374,000 Selling expenses 120,000 132,000 Admin expenses 90,000 106,500 Depreciation 60,000 47,500 Net Income 80,000 88,000

Q7a. You congratulate Natalia but tell her that you must review the accounts. You decide to compare the 2019 with 2018 using vertical analysis. Compute the indices, rounding to one decimal place. [1 mark]

2018 2019 Sales CGS Gross margin Selling expenses Admin expenses Depreciation Net Income

Q7b. Use the indices to analyze performance in 2019. [1 marks]

What aspect of the business needs improvement in 2020? [ mark]

Q7c. After conducting the analysis and reviewing the books you discover that the equipments residual value had been revised. Will you pay the bonus? State Yes or No and explain the basis for your decision. [ mark]

Pay the bonus? Yes or No Explanation for my decision

Q7d. Irrespective of your decision about paying the bonus for 2019, Natalia is your cousin. So, you must keep her as manager during 2020, and you must give her the opportunity to earn a bonus next year. What changes should be made to determination of the bonus for 2020? [1 mark]