Question

Handy Hardware is a retail hardware store. Information about the store’s operations follows.

• November 20x1 sales amounted to $200,000. • Sales are budgeted at $220,000 for December 20x1 and $200,000 for January 20x2.

• Collections are expected to be 60 percent in the month of sale and 38 percent in the month follow-ing the sale. Two percent of sales are expected to be uncollectible. Bad debts expense is recognized monthly.

• The store’s gross margin is 25 percent of its sales revenue.

• A total of 80 percent of the merchandise for resale is purchased in the month prior to the month of sale, and 20 percent is purchased in the month of sale. Payment for merchandise is made in the month following the purchase.

• Other monthly expenses paid in cash amount to $22,600.

• Annual depreciation is $216,000.

The company’s balance sheet as of November 30, 20x1, is as follows:

HANDY HARDWARE, INC.

Balance Sheet

November 30, 20x1

Assets

Cash ..........................................................................................................................................................................$    22,000

Accounts receivable (net of $3,500 allowance for uncollectible accounts) ..........................................................76,000

Inventory ...................................................................................................................................................................140,000

Property, plant, and equipment (net of $590,000 accumulated depreciation) .....................................................    862,000

Total assets ...............................................................................................................................................................$1,100,000

Liabilities and Stockholders’ Equity

Accounts payable .....................................................................................................................................................$    162,000

Common stock .........................................................................................................................................................795,000

Retained earnings ....................................................................................................................................................    143,000

Total liabilities and stockholders’ equity .................................................................................................................$1,100,000

Required: Compute the following amounts.

1. The budgeted cash collections for December 20x1.

2. The budgeted income (loss) before income taxes for December 20x1.

3. The projected balance in accounts payable on December 31, 20x1.

Answer 1

1. Budgeted Cash Collections for December 20x1: $208000

Collection from sales for:
November ($200000 x 38%)	76000
December ($220000 x 60%)	132000
Total cash collections $	208000

2. Budgeted Income before income taxes for December 20x1: $10000

Budgeted sales revenue		220000
Cost of goods sold (75% x $220000)		165000
Gross margin (25% x $220000)		55000
Other expenses	22600
Depreciation expense ($216000 x 1/12)	18000
Bad debt expense (2% x $220000)	4400
Total expense		45000
Budgeted income before income tax $		10000

3. Projected balance in accounts payable on December 31, 20x1: $153000

Accounts payable, November 30, 20x1		162000
Add: Purchases in December for:
December (20% x 75% x $220000)	33000
January (80% x 75% x $200000)	120000
Total purchases during December		153000
		315000
Less: Payments in December		162000
Accounts payable, December 31, 20x1		153000