Student Forums CMA Part 1 Section B: Planning, Budgeting and Forecasting B.4. Budget Methodologies Question ID: CMA 1283 4.23 (Topic: Budget Methodologies)

Question ID: CMA 1283 4.23 (Topic: Budget Methodologies)

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  • #101403

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    This forum is restricted to members of the associated course(s).

    Andrewp5455
    Participant
    I missed this question due to the bad debt expense being 2%.  Looking through the question again I don’t see any mention of bad debt expense except in the answer.  Can someone let me know if I am just missing something here.
     
     

    24. Question ID: CMA 1283 4.23 (Topic: Budget Methodologies)Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly’s operations are as follows:

    • Sales are budgeted at $220,000 for December year 1 and $200,000 for January year 2.
    • Collections are expected to be 60% in the month of sale and 38% in the month following the sale.
    • Gross margin is 25% of sales.
    • A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and 20% is purchased in the month of sale. Payment for merchandise is made in the month following the purchase.
    • Other expected monthly expenses to be paid in cash are $22,600.
    • Annual depreciation is $216,000.

    Below is Kelly Company’s statement of financial position at November 30, year 1.

    Assets  
    Cash $22,000
    Accounts receivable
    (net of $4,000 allowance for uncollectible accounts)
    76,000
    Inventory 132,000
    Property, plant, and equipment
    (net of $680,000 accumulated depreciation)
    870,000
    Total assets $1,100,000
    Liabilities and Stockholders’ Equity  
    Accounts payable $162,000
    Common stock 800,000
    Retained earnings 138,000
    Total liabilities and stockholders’ equity $1,100,000

    The budgeted income (loss) before income taxes for December year 1 is

    • A. Some amount other than those given.wrong
    • B. $28,000.
    • C. $32,400.
    • D. $10,000.correct

    Your Incorrect Answer Explanation:

    The correct amount is given as one of the choices.

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  • #101409

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    Lynn Roden
    HOCK international

    Hi Andrewp5455,

    The answer explanation explains how the 2% is derived from the information that is given. It says,

    “Bad debt expense is 2% of the budgeted $220,000 in sales for December, Year 1. Since no information is given that would permit use of the percentage of receivables method of calculating bad debt expense, we assume the company uses the percentage of sales method. Sales of $220,000 are given in the problem, and the 2% in bad debts can be calculated.  Since collections are expected to be 60% in the month of sale and 38% in the month following the sale, that leaves 2% of sales that are uncollectible. Therefore, bad debt expense for December is $220,000 × 0.02, or $4,400.”

    Lynn

    #238901

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    Mykhailo Nos
    Participant

    Dear Lynn:
    When I was working on the question, I wondered, if the remaining 2% were bad debts, or they were to be collected after the month following the sale. I decided, that, as nothing was mentioned about expenses on the allowance for credit losses, 2% supposed to be collected in the later periods. And it appeared, that I was wrong.
    I think that the question was formulated ambiguously. Should I be prepared, that some questions are formulated with possibility of different understanding or I should guess, which condition is not evidently expressed?

    Kind regards,
    Mykhailo

    #238909

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    Lynn Roden
    HOCK international

    Hello Mykhailo,

    I think you were probably over-thinking this. The question says “Collections are expected to be 60% in the month of sale and 38% in the month following the sale.” If any other collections were expected, they would have been included in that statement. Since no other amounts were included in that statement, no other amounts were expected.

    Lynn

    #238946

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    Mykhailo Nos
    Participant

    Thank you, Lynn!
    I guess, I still have to get used to the way IMA formulates questions…

    Have a nice day!
    Mykhailo

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