Question

Goldberg Company is a retail sporting goods store that uses an accrual accounting system. Facts regarding its operations follow: Sales are budgeted at $320,000 for December and $290,000 for January, terms 1/eom, n/60. Collections are expected to be 50% in the month of sale and 48% in the month following the sale. Two percent of sales are expected to be uncollectible and recorded in an allowance account at the end of the month of sale. Bad debts expense is included as part of operating expenses. Gross margin is 30% of gross sales. All accounts receivable are from credit sales. Bad debts are written off against the allowance account at the end of the month following the month of sale. Goldberg desires to have 80% of the merchandise for the following month’s sales on hand at the end of each month. Payment for merchandise is made in the month following the month of purchase. Other monthly operating expenses to be paid in cash total $25,600. Annual depreciation is $228,000, one-twelfth of which is reflected as part of monthly operating expenses. Goldberg Company’s statement of financial position at the close of business on November 30 follows: GOLDBERG COMPANY Statement of Financial Position November 30, 2019 Assets Cash $ 27,000 Accounts receivable (net of $4,000 allowance for doubtful accounts) 74,000 Inventory 179,200 Property, plant, and equipment (net of $670,000 accumulated depreciation) 1,050,000 Total assets $ 1,330,200 Liabilities and Stockholders’ Equity Accounts payable $ 147,000 Common stock 800,000 Retained earnings 383,200 Total liabilities and equity $ 1,330,200 Required: 1. What is the total of budgeted cash collections for December? 2. How much is the book value of accounts receivable at the end of December? 3. How much is the income (loss) before income taxes for December? 4. What is the projected balance in inventory on December 31, 2019? 5. What are budgeted purchases for December? 6. What is the projected balance in accounts payable on December 31, 2019? (For all requirements, Do not round intermediate calculations.)

Answer 1

1. Since it is given that collection are recieved as 50% in the month of sales and 48% in the following month and the remaining is recorded as allowance for bad debts.

So, the collection the month of December should be, the debtors outstanding in the month of November and 50% of the sales of December i.e. 74,000 of the month of November and 50% of the sales of December (320,000 as budgeted).

Total = 74,000 + 50%(320000)

= 234,000

2. Since, the company records 2% as allowance for bad debts in the month of sale.

So, Account recivable should be 50% of the sales less the allowance for bad debts.

Total = 50% (320,000) - 2% (320,000)

= 153,600

About the ending balance of November of accounts receivables, it will be recieved in the current

month, so it comes down to zero.

3. Since the company has a 30% gross margin, includes the allowance for bad debts as operating expenses, the other monthly operating expenses are 25,600 and depricaition of total 228,000 is charged monthly.

Gross Profit = 30% of sales

= 30% (320,000)

= 96,000

less: operating expenses = 25,600 + allowance for bad debts i.e.2% (320,000)

= 25,600 + 6400

= 32,000

Operating income = gross profit - operating expenses

= 96,000 - 32,000

= 64,000

Income before taxes = Operating income - depriciation i.e.(228,000/12)

= 64,000 - 19,000

= 45,000

4. Since the company maintains 80% of the sales of the following month in hand as inventory and maitains a gross margin of 30% i.e.Cost of Goods Sold should be 70% of sales, therefore the inventory should be 80% of the Cost of Goods Sold.

Cost of Goods Sold for the month of January = 70% (290,000 as budgeted)

= 203,000

Inventory at the end of month of december should be = 80% (Cost of goods sold for the next month)

= 162,400

5. Since Cost of Goods Sold = Opening inventory + Purchases - Closing inventory

Therefore, Purchases (December) = Cost of Goods Sold (December) + Closing Inventory (December) - Opening inventory (December)

Purchases = 70% (320,000) + 162,400 - 179,200

= 207,200

6. Since the company makes the payment for purchases in the following month of purchases. Therefore, the Accounts payable for the month should be the amount of purchases in the month.

Accounts payable = 207,200