Question

The following transactions apply to Park Company for Year 1:

Received $29,500 cash from the issue of common stock.
Purchased inventory on account for $142,000.
Sold inventory for $172,500 cash that had cost $105,500. Sales tax was collected at the rate of 7 percent on the inventory sold.
Borrowed $21,600 from First State Bank on March 1, Year 1. The note had a 7 percent interest rate and a one-year term to maturity.
Paid the accounts payable (see transaction 2).
Paid the sales tax due on $150,000 of sales. Sales tax on the other $22,500 is not due until after the end of the year.
Salaries for the year for one employee amounted to $30,000. Assume the Social Security tax rate is 6 percent and the Medicare tax rate is 1.5 percent. Federal income tax withheld was $5,400.
Paid $2,600 for warranty repairs during the year.
Paid $11,500 of other operating expenses during the year.
Paid a dividend of $5,000 to the shareholders.
Adjustments:
The products sold in transaction 3 were warranted. Park estimated that the warranty cost would be 5 percent of sales.
Record the accrued interest at December 31, Year 1.
Record the accrued payroll tax at December 31, Year 1. Assume no payroll taxes have been paid for the year and that the unemployment tax rate is 6.0 percent (federal unemployment tax rate is 0.60 percent and the state unemployment tax rate is 5.40 percent on the first $7,000 of earnings per employee).
Prepare an income statement for Year 1.

Answer 1

To compile an income statement for Park Company for Year 1, we start by calculating net sales revenue after accounting for sales tax, then deduct cost of goods sold to find gross profit.

Step-by-step explanation:

Park Company Income Statement for Year 1

To calculate Park Company’s income statement for Year 1, we need to consider various transactions and adjustments, which impact different parts of the financial statements. An income statement is a financial report that shows the company's revenues and expenses, culminating in the net income or loss over a specific reporting period.

Let's start with revenue. Park Company sold inventory for $172,500 cash. However, we must account for sales tax too. Given that the sales tax rate is 7%, it's been collected on the sold inventory. We subtract the sales tax receivable that's not due yet to find the net sales revenue that will be reported on the income statement.

Next, cost of goods sold (COGS) is $105,500, which will be subtracted from the net sales revenue to find the gross profit. We then account for operating expenses, including salaries, payroll taxes, warranty repairs, and other operating expenses. Payroll taxes include Social Security tax, Medicare tax, and unemployment taxes, and need to be accrued since no payment has been made for the year.

Park Company must also recognize an expense for the interest accrued on its loan from the bank (7% of $21,600), as well as adjustments for warranty expenses (estimated at 5% of sales).

After summing all expenses and subtracting them from the gross profit, we obtain the net income before tax. We subtract the income tax withheld to determine the net income for the year. Finally, the paid dividend will not affect the income statement as it's a distribution of earnings, not an expense.

Note: Actual numerical calculations are not provided here, as the instructions are about the format and process rather than specific figures.