Question

Presented below is information related to Crane Corp. for the year 2020.
Net sales $1,040,000
Write-off of inventory due to obsolescence $64,000
Cost of goods sold 624,000
Depreciation expense omitted by accident in 2019 44,000
Selling expenses 52,000
Casualty loss 40,000
Administrative expenses 38,400
Cash dividends declared 36,000
Dividend revenue 16,000
Retained earnings at December 31, 2019 784,000
Interest revenue 5,600
Effective tax rate of 20% on all items
Prepare a multiple-step income statement for 2020. Assume that 60,800 shares of common stock are outstanding for the entire year.

Answer 1

Answer:

Crane Corp.

Income Statement for the year ended December 31, 2020:

Net Sales                                           $1,040,000

Cost of goods sold                                624,000

Inventory write-off                                  (64,000)

Gross Profit                                          $352,000

Selling Expense                52,000

Administrative Expenses 38,400

Depreciation Expenses*  44,000        134,400

Operating Income                             $217,600

Dividend Revenue                                 16,000

Interest Revenue                                    5,600

Casualty loss                   40,000       (40,000)

Pre-Tax Income                                 $199,200

20% Income Tax                                  (39,840)

After Tax Income                              $159,360

Retained Earnings        784,000

Depreciation Expense  (44,000)      740,000

Dividends declared                           (36,000)

Retained Earnings c/f                  $863,360

*This depreciation expense is for the current year, assumed to be based on a straight-line method, using the omitted last year's charge as a basis.

Explanation:

a) Depreciation expense had been provided for the current year to avoid the problem reporting previously.

b) According to wikipedia, "A casualty loss is a type of tax loss that is a sudden, unexpected, or unusual event."  It states that a "damage or loss resulting from progressive deterioration of property through a steadily operating cause would not be a casualty loss."

c) An inventory write-off is the formal recognition of a portion of a company's inventory that no longer has value.  There are two ways to record an inventory write-off.  It may be expensed directly to the cost of goods sold or it may offset the inventory asset account in a contra asset account, commonly referred to as the allowance for obsolete inventory or inventory reserve.