Question

The December 31, 2019, balance sheet for Franklin Corporation is presented here. These are the only accounts on Franklin’s balance sheet. Amounts indicated by question marks (?) can be calculated using the following additional information:

FRANKLIN CORPORATION Balance Sheet As of December 31, 2019
Assets
Cash	$	40,000
Accounts receivable (net)		?
Inventory		?
Property, plant, and equipment (net)		294,000
	$	441,000
Liabilities and Stockholders’ Equity
Accounts payable (trade)	$	?
Income taxes payable (current)		40,000
Long-term debt		?
Common stock		300,000
Retained earnings		?
	$	?

Additional Information
Current ratio (at year end)	1.5 to 1.0
Total liabilities ÷ Total stockholders’ equity		80	%
Gross margin percent		30	%
Inventory turnover (Cost of goods sold ÷ Ending inventory)		9.8	times
Gross margin for 2019	$	315,000

Required

1. Compute the balance in trade accounts payable as of December 31, 2019.
2. Compute the balance in retained earnings as of December 31, 2019.
3. Compute the balance in the inventory account as of December 31, 2019. (Assume that the level of inventory did not change from last year.)

(For all requirements, negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

	a. Accounts payable b. Retained earnings c. Inventory

Answer 1

Answer c.

Gross margin percent		30	%
Inventory turnover (Cost of goods sold ÷ Ending inventory)		9.8	times
Gross margin for 2019	$	315,000

Sales = gross margin / gross margin% * 100 = 315000 / 30 * 100 = 1,050,000

Cost of goods sold = Sales - gross profit = 1050000 - 315000 = 735,000

Inventory turnover = COGS / ending inventory

Ending inventory = COGS / inventory turnover = 735000 / 9.8 = 75000

Balance of inventory = $75000

Answer a.

Accounts receivable = Total assets - cash - inventory - property plant equipment

Accounts receivable = 441000 - 40000 - 75000 - 294000 = 32000

Current ratio = 1.5 /1

Current ratio = Current assets / current liabilities

1.5/1 = [40000 + 75000 +32000] / [Accounts payable + 40000]

1.5 * [Accounts payable + 40000] = 147000

Accounts payable + 40000 = 58000

Accounts payable = $58000

Answer b.

Total liabilities ÷ Total stockholders’ equity

80

%

Total stockholders’ equity = Total assets - total liabilities

Thus,

80% = Total liabilities / Total assets - total liabilities

0.8 * [441000 - total liabilities ] = Total liabilities

352800 - 0.8TL = TL

352800 = 1.8 TL

TL = 352800 / 1.8 = 196000

Total liabilities = 196000

Total stockholders’ equity = Total assets - total liabilities = 441000 - 196000 = 245000

Total stockholders’ equity = Common stock + retained earnings

Retained earnings = Total stockholders’ equity - Common stock = 245000 - 300000 = -55000

calculated using the following additional information:

FRANKLIN CORPORATION Balance Sheet As of December 31, 2019
Assets
Cash	$	40,000
Accounts receivable (net)		32000
Inventory		75000
Property, plant, and equipment (net)		294,000
	$	441,000
Liabilities and Stockholders’ Equity
Accounts payable (trade)	$	58000
Income taxes payable (current)		40,000
Long-term debt		98000
Common stock		300,000
Retained earnings		-55000
	$	441000