Question

A company’s activities for Year 2 included the following: Gross sales $3,600,000 Cost of goods sold 1,200,000 Selling and administrative expense 500,000 Adjustment for a prior-year understatement of amortization expense 59,000 Sales returns 34,000 Gain on sale of available-for-sale securities 8,000 Gain on disposal of a discontinued business segment 4,000 Unrealized gain on available-for-sale securities 2,000 The company has a 30% effective income tax rate. What is the company’s net income for Year 2?
A. $1,267,700
B. $1,273,300
C. $1,314,600
D. $1,316,000

Answer 1

Answer: Option (B) is correct.

Explanation:

Net sales = Gross sales - Sale return

                = $3,600,000 - 34,000

                = $3,566,000

Gross profit = Net sales - COGS

                    = $3,566,000 - $1,200,000

                    = $2,366,000

Total Income = Gross profit  - S& A expense - Prior period expense + Gain on sale of securities + Gain on disposal of business segment

                      = $2,366,000  - $500,000 - $59,000 + $8,000 + $4,000

                      = $1,819,000

Net Income for Year 2 = Total Income - [email protected]%

                                      = $1,819,000 - $545,700

                                      = $1,273,300