Question

The December 31, Year 4, balance sheet for Rundle Corporation is presented here. These are the only accounts on Rundle’s balance sheet. Amounts indicated by question marks (?) can be calculated using the following additional information:

RUNDLE CORPORATION Balance Sheet As of December 31, Year 4
Assets
Cash	$	33,000
Accounts receivable (net)		?
Inventory		?
Property, plant, and equipment (net)		301,000
	$	420,000
Liabilities and Stockholders’ Equity
Accounts payable (trade)	$	?
Income taxes payable (current)		33,000
Long-term debt		?
Common stock		307,000
Retained earnings		?
	$	?

Additional Information
Current ratio (at year end)	1.6 to 1.0
Total liabilities ÷ Total stockholders’ equity		60	%
Gross margin percentage		30	%
Inventory turnover (Cost of goods sold ÷ Ending inventory)		12.5	times
Gross margin for Year 4	$	315,000

Required
a. Compute the balance in trade accounts payable as of December 31, Year 4.
b. Compute the balance in retained earnings as of December 31, Year 4.
c. Compute the balance in the inventory account as of December 31, Year 4. (Assume that the level of inventory did not change from last year.)

Answer 1

Working:

1)Calculation of sales and cost of goods sold:

sales =Gross margin $ /Gross margin %

          = 315000 /30%

         = $ 1,050,000

Cost of goods sold = Sales [1-gross margin%]

                   = 1,050,000 [1-.30]

                   = 1,050,000*.70

                   = 735000

Inventory turnover ratio =Cost of goods sold /Inventory

12.5 = 735000/Inventory

Inventory = 735000/12.5

      = 58800

Total current asset =Total asset - plant property and equipment

               =420000- 301000

              = 119000

a)current ratio =current asset/current liabilities

   1.6 = 119000 / current liabilities

current liabilities = 119000/1.6

               = 74375

now,

current liabilities =Accounts payable+ income tax payable

74375 = Accounts payable+33000

Accounts payable = 74375 -33000

           = 41375

the balance in trade accounts payable as of December 31, Year 4 = 41375

b)Let the Equity be X .Total liabilities /total equity = .60 /X which means liabilities= .60 X

Total asset =Total liabilities+total equity

420000 = .60X +X

420000 = 1.60X

X= 420000/1.6

    = 262500

Total equity = 262500

Now,

Total equity = common stock+retained earning

      262500           = 307000+retained earning

retained earning = 262500-307000

                = - 44500

the balance in retained earnings as of December 31, Year 4 = -44500

c)

Inventory turnover ratio =Cost of goods sold /Inventory

12.5 = 735000(see working above) /Inventory

Inventory = 735000/12.5

      = 58800

the balance in the inventory account as of December 31, Year 4. = 58800