Direct Method - Example

Grate Big Company

Comparative Balance Sheets - Assets

December 31,
2002 2003
Cash $ 60,000 $ 70,370
Accounts Receivable, net 27,000 35,000
Inventory 230,000 200,000
Trading Securities - 25,000
Equipment, net 500,000 425,000
Investment in Tiny Co. 100,000 130,000
Total Assets $ 917,000 $ 885,370
Direct Method - Example
Grate Big Company
Comparative Balance Sheets - Liabilities and Equity
December 31,
2002 2003
Accounts Payable $ 15,000 $ 12,000
Salaries Payable 7,000 5,000
Interest Payable 11,950 7,350
Income Tax Payable 20,000 17,000
Notes Payable, Bob's Bank 70,000 60,000
Bonds Payable 250,000 150,000
Premium on Bonds Payable 5,000 4,000

Common Stock 450,000 500,000

Retained Earnings 88,050 130,020
Total Liabilities and Equity $ 917,000 $ 885,370
Direct Method - Example
Grate Big Company
Income Statement Amounts
For the Year Ending December 31, 2003

Sales Revenues $ 800,000

Cost of Goods Sold 560,000
Depreciation Expense 5,000
Interest Expense 28,050
Income Tax Expense 27,980
Salary Expense 80,000
Other Expenses 71,000
Amortization of Bond Premium 1,000
Gain on Sale of Equipment 3,000
Extraordinary Loss 30,000
Equity in Investee Income 40,000
Net Income $ 41,970
Direct Method - Example
Additional Information
• Trading Securities were purchased during 2003 at a
cost of $25,000.
• Equipment with a book value of $40,000 was sold
during the year for $43,000.
• Equipment with a book value of $30,000 was
destroyed during a freak flood in 2003. There was no
insurance.
• Grate Big holds a 25% investment in Tiny Co. and
accounts for it using the Equity Method.
Direct Method - Example
Additional Information
• Grate Big’s tax rate is 40%.
• The Notes Payable to Bob’s Bank carry a 12% rate.
The payments are due on the first day of each month.
• The Bonds Payable carry a 9% rate. Interest is
payable semiannually on July 1 & Jan. 1.
• Grate Big sold stock during 2001 for $50,000.
• Grate Big received $10,000 dividends from Tiny Co.