Question

Goldberg Company is a retail sporting goods store that uses an accrual accounting system. Facts regarding its operations follow: • Sales are budgeted at $250,000 for December and $225,000 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 sales. Bad debts expense is included as part of operating expenses. • Gross margin is 30% of 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 $25,000. • Annual depreciation is $216,000, 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, 2016 Assets Cash $ 30,000 Accounts receivable (net of $4,000 allowance for doubtful accounts) 76,000 Inventory 132,000 Property, plant, and equipment (net of $680,000 accumulated depreciation) 870,000 Total assets $ 1,108,000 Liabilities and Stockholders’ Equity Accounts payable $ 162,000 Common stock 800,000 Retained earnings 146,000 Total liabilities and equity $1,108,000 1. What is the total of budgeted cash collections for December? (Do not round intermediate calculations.) 2. How much is the book value of accounts receivable at the end of December? (Do not round intermediate calculations.) 3. How much is the income (loss) before income taxes for December? (Do not round intermediate calculations.) 4. What is the projected balance in inventory on December 31, 2016? (Do not round intermediate calculations.) 5. What are budgeted purchases for December? (Do not round intermediate calculations.) 6. What is the projected balance in accounts payable on December 31, 2016? (Do not round intermediate calculations.) Total liabilities and equity $ 1,108,000

Answer 1

1. Budgeted cash collections for December $201,000

Working:

Schedule of cash collections
	December
Budgeted sales	250000
Collections:
From November Sale	76000
From December sale (50%)	125000
Total Collections	201000

2.

Accounts Receivable (Net of $5,000 for doubtful accounts) = $120,000.

Working:

December sale	250000
Collected in December (50%)	125000
Balance in accounts receivable	125000
Allowance for doubtful account (2% of sale)	5000
Accounts receivable net of allowance	120000

3.

Income before income taxes =$28,000

Working:

Sales		250000
Gross margin    - 30% of sales		75000
Expenses:
Bad Debts (November balance)	4000
Monthly operating expenses	25000
Depreciation expense ($216,000 / 12)	18000
Total operating expenses		47000
Net income before taxes		28000

4. Projected balance in inventory on December31, 2016 = $126,000

Working:

Sales for January	225000
Gross margin for January - 30% of sales	67500
Cost of goods sold for January	157500
Ending inventory for December - 80% of cost	126000
of goods sold for January

5. Purchases for December = $169,000

Working:

Budgeted sales for December	250000
Less: Gross margin   -- 30% of sales	75000
cost of goods sold	175000
Add: Desired Inventory as at December 31, 2016	126000
Goods required	301000
Less: Inventory ast at November 30, 2016	132000
Purchases for December	169000

6.Projected balance in accounts payable on December31, 2016 = $196,000.

Since the payment for merchandise purchase is made the following month, the purchases in December, will be the accounts payable as on December31, 2016.