Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2010, 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 2010. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2009 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 ________. (See Table 4.4)

Question

Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2010, 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 2010. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2009 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 ________. (See Table 4.4)

Quizplus · Accepted Answer

Using the percent-of-sales method, we can estimate Hennesaw Lumber's income statement for 2010 as follows:

Sales: $4,500,000
Cost of goods sold (60% of sales): $2,700,000
Gross profit: $1,800,000
Operating expenses (30% of sales): $1,350,000
Operating income: $450,000
Interest expense: $105,000
Income before taxes: $345,000
Taxes (40% of income before taxes): $138,000
Net income: $207,000

Now, we can calculate the change in retained earnings as follows:

Net income: $207,000
Less: Dividends: $150,000
Retained earnings: $57,000 increase

Therefore, the answer is C, increase $57,000.

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