Answer:
a. No allocation
2019 2020 2021
Gross Profit on Sales 350,000 349,000 351,000
Less: Operating Expense <u>210,000</u> <u>210,000</u> <u>210,000</u>
Gross Revenue 140,000 139,000 141,000
Rent (Prepaid) 0 0 0
Revenue after Rent paid 140,000 139,000 141,000
Less: Corporate Taxes at 30% <u>42,000 41,700 42,300</u>
Net Income <u>$98,000 $97,300 $98,700</u>
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Considerations for No Allocation
- Taxes are to be deducted from Gross Profit.
- Rent not to be deducted from Gross Profit.
b. Comprehensive Allocation
2019 2020 2021
Gross Profit on Sales 350,000 349,000 351,000
Less: Operating Expense <u>210,000</u> <u>210,000</u> <u>210,000</u>
Gross Revenue 140,000 139,000 141,000
Rent (Prepaid) <u>60,000</u> <u>60,000</u> <u>60,000</u>
Revenue after Rent paid 80,000 79,000 81,000
Less: Corporate Taxes at 30% <u>24,000</u> <u>23,700</u> <u>24,300</u>
Net Income <u>56,000</u> <u>55,300</u> <u>56,700</u>
Considerations for Comprehensive Allocation
- Taxes are to be deducted from Gross Profit.
- Rent is to be deducted from Gross Profit.
c. No allocation distorts Mark or Make’s Net Income for all three years. This is because if Rent is not allocated taxes will be calculated on Gross Revenue. That is to say, Rent is a Non-Operating Expense and hence is to be deducted from Revenue to Calculate the Taxes. When Revenue is reduced, obviously, the taxes will be reduced. Hence, less income is seen in Comprehensive Income Statement and more Revenue is seen in Simple - Non Comprehensive Statement.
