Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2015. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2014 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions.
-The pro forma net profits after taxes for 2015 are ________. (See Table 4.4)
A) $202,500
B) $207,000
C) $52,500
D) $57,000

Question

Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2015. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2014 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions. 
-The pro forma net profits after taxes for 2015 are ________. (See Table 4.4)
A) $202,500 
B) $207,000 
C) $52,500 
D) $57,000

Quizplus · Accepted Answer

First, we need to determine the percentages of each category relative to sales:

- Cost of goods sold = 70% of sales ($4,500,000 x 70% = $3,150,000)
- Selling and administrative expenses = 18% of sales ($4,500,000 x 18% = $810,000)
- Depreciation expense = 3% of sales ($4,500,000 x 3% = $135,000)
- Interest expense = $105,000 (unchanged)
- Taxes = 40% of operating income ((70% - 18% - 3% - 105,000) x 40% = $70,200)

Then, we can use these percentages to create the pro forma income statement:

Hennesaw Lumber, Inc.
Pro Forma Income Statement
For the Year Ended December 31, 2015

Sales                                  $4,500,000
Cost of goods sold            ($3,150,000)
Gross profit                          $1,350,000

Selling and administrative expenses ($810,000)
Depreciation expense         ($135,000)
Operating income                   $405,000

Interest expense                    ($105,000)
Income before taxes             $300,000

Taxes (@ 40%)                       ($70,200)
Net income                              $229,800

Minus: Dividends paid             ($150,000)
Net profit after dividends    $79,800

Therefore, the pro forma net profit after taxes for 2015 is $229,800 - $150,000 = $79,800, which corresponds to option B.

Table 4.4 Use the Percent-Of-Sales Method to Prepare a Pro Forma Income