A company’s activities for Year 2 included the following: Gross sales $3,600,000 Cost of goods sold 1,200,000 Selling and administrative expense 500,000 Adjustment for a prior-year understatement of amortization expense 59,000 Sales returns 34,000 Gain on sale of available-for-sale securities 8,000 Gain on disposal of a discontinued business segment 4,000 Unrealized gain on available-for-sale securities 2,000 The company has a 30% effective income tax rate. What is the company’s net income for Year 2?
A. $1,267,700
B. $1,273,300
C. $1,314,600
D. $1,316,000

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Dryomys Dryomys · Answer 1 · 2019-09-05T13:42:03+02:00

Answer: Option (B) is correct.

Explanation:

Net sales = Gross sales - Sale return

= $3,600,000 - 34,000

= $3,566,000

Gross profit = Net sales - COGS

= $3,566,000 - $1,200,000

= $2,366,000

Total Income = Gross profit - S& A expense - Prior period expense + Gain on sale of securities + Gain on disposal of business segment

= $2,366,000 - $500,000 - $59,000 + $8,000 + $4,000

= $1,819,000

Net Income for Year 2 = Total Income - Tax@30%

= $1,819,000 - $545,700

= $1,273,300