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 accumulated retained earnings account on the balance sheet is projected to be ________. (See Table 4.4)
A) $62,500
B) $52,500
C) $57,000
D) $67,000

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 accumulated retained earnings account on the balance sheet is projected to be ________. (See Table 4.4)
A) $62,500 
B) $52,500 
C) $57,000 
D) $67,000

Quizplus · Accepted Answer

First, we need to calculate the projected amounts for each income statement line item using the given sales forecast and the percentages provided in the table:

- Cost of goods sold: 65% x $4,500,000 = $2,925,000
- Gross profit: $4,500,000 - $2,925,000 = $1,575,000
- Operating expenses: 30% x $4,500,000 = $1,350,000
- Operating income: $1,575,000 - $1,350,000 = $225,000
- Interest expense: remains unchanged at $105,000
- Net income before taxes: $225,000 - $105,000 = $120,000
- Taxes (40%): 0.4 x $120,000 = $48,000
- Net income after taxes: $120,000 - $48,000 = $72,000
- Dividends: $150,000 (given)
- Addition to retained earnings: $72,000 - $150,000 = -$78,000 (negative because dividends are greater than net income)

To calculate the projected accumulated retained earnings, we need to add the balance from the previous year to the addition for the current year:

- Accumulated retained earnings, December 31, 2014: $495,000
- Addition to retained earnings, 2015: -$78,000
- Accumulated retained earnings, December 31, 2015: $495,000 - $78,000 = $417,000

Therefore, the answer is C, $57,000, which is not one of the answer choices. It appears there is an error in the question or in the provided table.

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