Question

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Current assets		Liabilities
Cash	\(15,000	Accounts payable	\)17,000
Accounts receivable	20,000	Notes payable	25,000
Inventory	30,000	Bonds payable	55,000
Prepaid expenses	12,500
Fixed assets		Stockholder’s equity
Plant and equipment (gross) Less: accumulated depreciation	\(255,000 51,000	Preferred stock	\)25,000
Net plant and equipment	\(204,000	Common stock	60,000
		Paid in capital	30,000
		Retained earnings	69,500
Total assets	\)281,500	Total liabilities and stockholder’s equity	\(281,500

Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were

unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

a. Prepare an income statement for 20X2.

Short answer

Baxter's earnings after tax amount to $35,200 (see full income statement below).

Step-by-step solution

Income statement

The income statement shows the financial performance of a company.

Income statement of Baxter corporation

Particulars	Amount ($)
Sales	245,000
Less: Cost of goods sold	147,000
Gross profit	98,000
Expenses
Selling and administrative expenses	24,500
Depreciation expense (8% of $255,000)	20,400
Operating profit (EBIT)	53,100
Interest expense on notes payable (10% of $25,000)	2,500
Interest expense on bonds payable (12% of 55,000)	6,600
Earnings before taxes	44,000
Less: Tax expense (20% of $44,000)	8,800
Earning after tax (EAT)	35,200
Less: Preference dividend	2,500
Earnings available to common stockholders	32,700
Shares outstanding	10,000*
Earnings per share	3.27