Acc334F2010-MT#1A-solution

Acc334F2010-MT#1A-solution - ACCOUNTING 334 - Fall 2010...

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ACCOUNTING 334 - Fall 2010 MID-TERM EXAM # 1A Dr. Jeff Power Suggested Solutions NOTES: ANSWER ALL QUESTIONS IN THE SPACE PROVIDED (Back of page if necessary) DO NOT SEPARATE THE PAGES OF THE EXAM. YOU HAVE 75 MINUTES TO COMPLETE THE EXAM SHOW ALL OF YOUR CALCULATIONS FOR POSSIBLE PART MARKS Problem #1 (35 points) The Kelly Company is a retail sporting goods store. Facts regarding their operation are as follows: Sales are budgeted at $220,000 for November and $200,000 for December. All sales are on credit. Accounts receivable are expected to be collected 60% in the month of the sale, 38% in the month following the sale, and 2% are expected to be uncollectible. The cost of goods sold is typically 75% of sales. Purchases of merchandise to be sold in the store are typically made 80% in the month prior to the sale and 20% in the month of the sale. Payment for purchases is made in the month following the purchase. Other cash expenses amount to $22,600 per month. Depreciation expenses average $18,000 per month (all related to selling and administrative). The company maintains inventory at 80% of next month’s needs. The Kelly Company’s tax rate is 25%. Kelly Company Balance Sheet As of October 31, 1999 Assets Liabilities Cash $ 22,000 Accounts payable $ 162,000 Accounts receivable 80,000 Allowance for bad debts (4,000) Shareholders’ equity Inventory 132,000 Common stock 800,000 Fixed assets (at cost) 1,550,000 Retained earnings 138,000 Accumulated depreciation (680,000 ) Total liabilities and Total Assets $ 1,100,000 shareholders’ equity $ 1,100,000 Required: 1. Calculate the budgeted cash collections for November. Collections in November should equal the cash collections from November sales plus collections from accounts receivable. Collections are 60% in the month of sale and the remainder in the month following the sale less any bad debts. Therefore collections in November are expected to be: $220,000 * .6 (current month) + $80,000 - $4,000 (prior months) = $208,000 2. Calculate the budgeted Net Income for November. Sales $ 220,000 Cost of sales (75%) 165,000 Gross margin 55,000 Less: Depreciation 18,000 Other expenses 22,600 Bad debt expense (220,000*0.02) 4,400 Net income (before tax) 10,000 Taxes (25%) 2,500 Net Income $ 7,500 3. Calculate the projected balance in accounts payable as of November 30. Since the company pays for all purchases in the month following the purchase the balance in accounts payable at the end of November would be equal to the amount of purchases made during November. The cost of sales is 75% of revenue and purchases are made 80% in the month prior to sale and 20% of the current month’s sales. Therefore:
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Acc334F2010-MT#1A-solution - ACCOUNTING 334 - Fall 2010...

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