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Income Statement with Depreciation

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General Phone Apps (GPA) is evaluating a proposal to internally develop a software capability that is intended to enhance their application (app) development process by automating testing and simplifying product conversion among different operating systems. Since it will be cloud based, it also will facilitate group development projects and enable employees to more easily work from different locations. This is not a product to be sold, but rather it will assist internal development of their app software, so it is depreciable.

The development and conversion process is estimated to take one year in year 0 and cost $1,000,000. This investment includes all programming training, loading of existing products and testing the resulting conversion. An internal project over the past year has been completed that evaluated the feasibility and created a macro design of the proposed system (sunk costs).

The new software is expected to both increase sales and decrease development costs. The sales for the present year (year 0) are $2.,000,000 and without this new software capability would likely grow 10% annually. The new software is forecast to enable a sales growth of 33.33% per year, instead of only 10%. The annual cost of fulfilling orders and customer support (COGS) is forecast at 50% of revenue and expected to continue at this level.

The change in Marketing and Sales expense related to this project would be an increase of $75,000 annually and unchanged over the projects time horizon. The annual cost of the cloud service will be $150,000 in year 1 and increase 10% annually after that.

A three year time horizon is to be used for the evaluation, although the software is expected to be used much longer. The GPA tax rate is 25%. Three-year MACRS depreciation has been chosen for the projects $1 million development and implementation cost.

Submit a spreadsheet containing an Income Statement for this proposal. Use the standard Income statement format that includes totals for COGS, SG&A, EBIT and Net Earnings.

No recommended decision is expected in this assignment as this requires a proposal cash flow statement that is next week's topic.

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Solution Summary

This represents an income statement and format for a communications firm outlining all revenues and costs.

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See Also This Related BrainMass Solution

Gitler Department Store: Instructions:
(a) (1) Prepare a multiple-step income statement for the year:
(a) (2) Prepare a retained earnings statement for the year:
(a) (3) Prepare a balance sheet for December 31, 2002.
(b) Journalize the adjusting entries.
(c) Journalize the closing entries that are necessary.

Problem P5-3A
Gitler Department Store is located near the Village Shopping Mall. At the end of the company's fiscal year on
December 31, 2002, the following accounts appeared in two of its trial balances:

Account title Unadjusted Adjusted Account title Unadjusted Adjusted
Accounts payable $79,300 $79,300 Interest revenue $4,000 $4,000
Accounts receivable 50,300 50,300 Merchandise inventory 75,000 75,000
Accumulated depreciation-Building 42,100 52,500 Mortgage payable 80,000 80,000
Accumulated depreciation-Equipment 29,600 42,900 Office salaries expense 32,000 32,000
Building 190,000 190,000 Prepaid insurance 9,600 2,400
Cash 23,000 23,000 Property taxes expense 4,800
Common stock 110,000 110,000 Property taxes payable 4,800
Cost of goods sold 412,700 412,700 Retained earnings 66,600 66,600
Depreciation expense-Building 10,400 Sales salaries expense 76,000 76,000
Depreciation expense-Equipment 13,300 Sales 628,000 628,000
Dividends 28,000 28,000 Sales commissions expense 11,000 15,500
Equipment 110,000 110,000 Sales commissions payable 4,500
Insurance expense 7,200 Sales returns and allowances 8,000 8,000
Interest expense 3,000 11,000 Utilities expense 11,000 11,000
Interest payable 8,000

Analysis reveals the following additional data:
1 Insurance expense and utilities expense are allotted to selling and administrative 60% Selling
40% Administrative
2 The portion of the mortgage payable due for payment the next year $20,000
3 Depreciation on the building and a property tax expense are administrative expenses; depreciation
on the equipment is a selling expense.
Instructions:
(a) (1) Prepare a multiple-step income statement for the year:
(a) (2) Prepare a retained earnings statement for the year:
(a) (3) Prepare a balance sheet for December 31, 2002.
(b) Journalize the adjusting entries.
(c) Journalize the closing entries that are necessary.

Please see attached document.

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