Question

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The budget director for Solomon Cleaning Services prepared the following list of expected selling and administrative...

The budget director for Solomon Cleaning Services prepared the following list of expected selling and administrative expenses. All expenses requiring cash payments are paid for in the month incurred except salary expense and insurance. Salary is paid in the month following the month in which it is incurred. The insurance premium for six months is paid on October 1. October is the first month of operations; accordingly, there are no beginning account balances.

Required

  1. Complete the schedule of cash payments for S&A expenses by filling in the missing amounts.

  2. Determine the amount of salaries payable the company will report on its pro forma balance sheet at the end of the fourth quarter.

  3. Determine the amount of prepaid insurance the company will report on its pro forma balance sheet at the end of the fourth quarter.

  4. October November December
    Budgeted S&A Expenses
    Equipment lease expense $6,800 $6,800 $6,800
    Salary expense 5,100 5,600 6,000
    Cleaning supplies 2,850 2,760 3,080
    Insurance expense 1,400 1,400 1,400
    Depreciation on computer 1,900 1,900 1,900
    Rent 1,900 1,900 1,900
    Miscellaneous expenses 710 710 710
    Total operating expenses $20,660 $21,070 $21,790
    Schedule of Cash Payments for S&A Expenses
    Equipment lease expense $6,800 $6,800 $6,800
    Prior month’s salary expense, 100% 0 5,100 5,600
    Cleaning supplies 2,850 2,760 3,080
    Insurance premium 0 0
    Depreciation on computer 0 0 0
    Rent 1,900 1,900 1,900
    Miscellaneous expenses 710 710 710
    Total disbursements for operating expenses $20,660 $17,270 $18,090

Solutions

Expert Solution

1)Complete the schedule of cash payments for S&A expenses by filling in the missing amounts.

Sol: As we can observe that insurance premium expense for each month is 1400 and as per the question, company pays the insurance premium for 6 months at once and it paid it first on 1st Oct, therefore, the company must've paid 8400 (i.e., 1400*6 months) on 1st Oct. It can also be calculated by deducting all the cash expenses from the total amount of disbursement, i.e, 20660-(6800+2850+1900+710).

2)Determine the amount of salaries payable the company will report on its pro forma balance sheet at the end of the fourth quarter.

Sol:The question has clearly mentioned that the company pays salary in the month following the month in which it is incurred or it gets due. Therefore the amount of salary got due on December will be paid on January. So, while preparing the pro forma balance sheet at the end of the fourth quarter, the company will show the amount of 6000, which got due during the month of December, as Salary Payable under the head "Current Liabilities" on the Liability Side of the Balance Sheet.

3)Determine the amount of prepaid insurance the company will report on its pro forma balance sheet at the end of the fourth quarter.

Sol: Since the company has paid the insurance premium expenses for 6 months all at once on 1st October, it has paid premium for the months of January, February and March of the following year in advance. Therefore, while preparing the pro forma balance sheet at the end of the fourth quarter, the company will show 4200 (i.e., 8400*3/6), as prepaid insurance for 3 months, under the head "Current Assets".

ekkarill92 answered 2 months ago
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