Thornton Manufacturing Company $($CMC$)$ was started when it acquired $$98,000$ by issuing common stock. During the first year of operations, the company incurred specifically identifiable product costs $($materials$,$ labor, and overhead$)$ amounting to $$67,200.$ CMC also incurred $$76,800$ of engineering design and planning costs. There was a debate regarding how the design and planning costs should be classified. Advocates of Option $1$ believe that the costs should be classified as general, selling, and administrative costs. Advocates of Option $2$ believe it is more appropriate to classify the design and planning costs as product costs. During the year, CMC made $4,800$ units of product and sold $3,900$ units at a price of $$39\mathrm{.}00$ each. All transactions were cash transactions.

Required

a$-1.$ Prepare an income statement and balance sheet under option $1.$

a$-2.$ Prepare an income statement and balance sheet under option $2.$

b$.$ Identify the option that results in financial statements that are more likely to leave a favorable impression on investors and creditors.

c$.$ Assume that CMC provides an incentive bonus to the company president equal to $12$ percent of net income. Compute the amount of the bonus under each of the two options. Identify the option that provides the president with the higher bonus.

d$.$ Assume a $40$ percent income tax rate. Determine the amount of income tax expense under each of the two options. Identify the option that minimizes the amount of the company$$s income tax expense.

Answer rating: 100% (QA)

a1 Income Statement and Balance Sheet under Option 1 Income Statement Sales Revenue 3900 units x 390... View the full answer