Kelly Company is a retail sporting goods store that uses an accrual accounting system. Facts regarding its

Question:

Kelly Company is a retail sporting goods store that uses an accrual accounting system. Facts regarding its operations follow:

• Sales are budgeted at $220,000 for December and $200,000 for January, terms 1/eom, n/60.

• Collections are expected to be 60 percent in the month of sale and 38 percent 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 25 percent 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.

• Kelly desires to have 80 percent 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 $22,600.

• Annual depreciation is $216,000, one-twelfth of which is reflected as part of monthly operating expenses.

Kelly Company's statement of financial position at the close of business on November 30 follows:

KELLY COMPANY

Statement of Financial Position

November 30, 2010

Assets

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

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 ...............$1,100,000

Liabilities and Stockholders’ Equity

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

Common stock .............. 800,000

Retained earnings .............. 138,000

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

Required

1. What is the total of budgeted cash collections for December?

2. How much is the book value of accounts receivable at the end of December?

3. How much is the income (loss) before income taxes for December?

4. What is the projected balance in inventory on December 31, 2010?

5. What are budgeted purchases for December?

6. What is the projected balance in accounts payable on December 31, 2010?

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