Question ID: CMA 1283 4.23 (Topic: Budget Methodologies)
- This topic has 4 replies, 2 voices, and was last updated 4 months, 3 weeks ago by Mykhailo Nos.
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.
Correct Answer Explanation:
The gross margin is $55,000 ($220,000 × 25%).
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.
Annual depreciation is given as $216,000, so December depreciation is 1/12 of that, or $18,000.
Subtracting other expected monthly expenses of $22,600, December bad debt expense of $4,400 and December depreciation of $18,000 from the gross margin of $55,000, leaves budgeted net income before income taxes of $10,000.
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