Question

Alpaca Corporation had revenues of $280,000 in its first year of operations. The company has not collected on $18,600 of its sales and still owes $26,700 on $95,000 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $11,500 in salaries. Owners invested $29,000 in the business and $29,000 was borrowed on a five-year note. The company paid $4,200 in interest that was the amount owed for the year, and paid $5,400 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%. Compute net income for the first year for Alpaca Corporation.

Answer 1

$99,960

Step-by-step explanation:

Gross margin:

= Revenue - Cost of goods sold

= $280,000 - $95,000

= $185,000

Profit before tax:

= Gross margin - salaries - insurance payment - Interest

= $185,000 - $11,500 - ($5,400 ÷ 2) - $4,200

= $166,600

Net Income:

= Profit before tax - Tax

= $166,600 - (40% × $166,600)

= $166,600 - $66,640

= $99,960

Note:

As there is no inventory on hand, so the whole merchandise is used as the Cost of Goods Sold.

Only half of 2-year payment of 6,800 is relevant for this year.