Question

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 2015 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 question. Income Statement Hennesaw Lumber, Inc. For the Year Ended December 31, 2014 Sales Revenue $4,200,000 Less: Cost of goods sold 3,570,000 Gross profits $ 630,000 Less: Operating expenses 210,000 Operating profits $ 420,000 Less: Interest expense 105,000 Net profits before taxes $ 315,000 Less: Taxes (40%) 126,000 Net profits after taxes $ 189,000 Less: Cash dividends 120,000 To: Retained earnings $ 69,000 The pro forma net profits after taxes for 2015 are​ ________.

Answer 1

207,000

Step-by-step explanation:

We can find the net profit after tax under the percent of sales method as follows. workings are explained as in order to estimate the net profit after tax we need to estimate the variable cost according to estimated sales.

Sales $4,500,000

Cost of Goods Sold ($3,825,000)

((3,570,000/4,200,000) x 4,500,000)

Gross Profit $675,000

Operating Expenses ($225,000 )

(( 210,000 / 4,200,000) x 4,500,000 )

Operating Profits $450,000

Interest Expense ($105,000 )

Net Profit before Taxes $345,000

Taxes ( 40 %) ($138,000 )

Net Profit after Taxes 207,000