REQUIRED: Prepare a detailed balance sheet. Listed below is a list of accounts and their respective balances for the Maximum Company: ADVERTISING EXPENSE $ 100,000 INSURANCE EXPENSE $ 100,000 OPERATING EXPENSES- OTHER $ 75,000 PURCHASES $ 50,000 REVENUES $ 1,000,000 SALARIES AND WAGES $250,000 Other Information: Inventory at the beginning of the year was $ 50,000 and at the end of the year was $ 40,000. Accrued wages of $ 5,000 have not been included in the above balances. Payroll taxes are 25% of Salaries and Wages. Total Fixed Assets equal $ 3,000,000 which breaks down as follows: Land- $750,000; Building and Equipment- $2,000,000; and Furniture- $250,000. For depreciation purposes, the XYZ Company uses the straight-line method. The depreciable assets have a useful life of 10 years and no residual value. XYZ has a long-term note of $ 1,000,000 and pays an interest rate of 10%. Rent is calculated as 1% of gross profit plus $500 per month. The XYZ pays income taxes at a rate of 25%. REQUIRED Prepare a detailed income statement.

Maximum Company

Income Statement

Revenue                                                                                  $ 1,000,000

Less Cost of Sales

Beginning Inventory                                         $ 50,000

Purchases                                                          $ 50,000

Less Ending Inventory                                     ($40,000)         ($60,000)

Gross Profit                                                                                $940,000

Less Expenses

Salaries and Wages ($250,000 + $5,000)    $255,000

Advertising expenses                                      $100,000

Insurance expenses                                         $100,000

Other Operating expenses                               $75,000

Depreciation                                                    $225,000

Interest expense                                              $100,000

Rent expense                                                       $9,900

Payroll taxes                                                       $63,750    ($898,650)

Net Income before tax                                                              $41,350

Income tax expense                                                                ($10,338)

Net Income after tax                                                                  $31,012

Explanation:

Depreciation expense :

Depreciation expense = (Cost - Salvage Value) ÷ Estimated Useful Life

therefore,

Depreciation expense = ($2,250,000) ÷ 10 = $225,000

Note :Land is not a depreciable asset    

Interest expense :

Interest expense = $1,000,000 x 10% = $100,000      

Rent expense :

Use the cost formula provided.

Rent expense = Gross profit x 1 % + $500        

                        = $940,000 x 1 % + $500

                        = $9,900        

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