Question

Lambert Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company’s fiscal year on November 30, 2014, these accounts appeared in its adjusted trial balance.
Accounts Payable............... $ 26,800
Accounts Receivable............... 17,200
Accumulated Depreciation—Equipment...... 68,000
Cash.................... 8,000
Common Stock................ 35,000
Cost of Goods Sold............... 614,300
Freight-Out.................. 6,200
Equipment.................... 157,000
Depreciation Expense............... 13,500
Dividends.................. 12,000
Gain on Disposal of Plant Assets.......... 2,000
Income Tax Expense............... 10,000
Insurance Expense............... 9,000
Interest Expense............... 5,000
Inventory................... 26,200
Notes Payable................. 43,500
Prepaid Insurance............... 6,000
Advertising Expense............... 33,500
Rent Expense................. 34,000
Retained Earnings............... 14,200
Salaries and Wages Expense........... 117,000
Sales Revenue.................. 904,000
Salaries and Wages Payable............ 6,000
Sales Returns and Allowances........... 20,000
Utilities Expense............... 10,600
Additional data: Notes payable are due in 2018.

Instructions
(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.
(b) Calculate the profit margin and the gross profit rate.
(c) The vice president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $40,443 and expenses by $58,600. Compute the expected new net income. Then, compute the revised profit margin and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)



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  • CreatedApril 07, 2014
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