Johnson Corporation sells kitchen products to entities in the restaurant business. At the beginning of the current
Question:
Johnson Corporation sells kitchen products to entities in the restaurant business. At the beginning of the current quarter, the company reports the following selected account balances.
Cash | $25,000 |
Accounts receivable | $120,000 |
Current payables | $140,000 |
Prepaid Assets | $50,000 |
Johnson’s management has made the following budget estimates regarding operations for the upcoming quarter:
Sales | $700,000 |
Purchases of inventory | $500,000 |
Salaries | $130,000 |
Debt service payment | $75,000 |
Tax liability payment | $45,000 |
Depreciation expense | $60,000 |
Thirty Percent of Johnson’s sales are made in cash. Seventy percent is on credit. For credit sales, 80% is collected in the current quarter and 20% is collected the following quarter. (Bad debts are negligible). Johnson pays for 75% of its inventory purchase during the quarter made and 25% in the following quarter. In addition, Johnson uses 50% of the beginning prepaid assets each quarter.
Johnson’s minimum cash balance requirement is $25,000. Should the balance fall below this amount, management will attempt to negotiate a short-term loan with a local bank. The company’s debt ratio (liabilities/assets) is currently at 80 percent.
Requirements:
- Compute Johnson’s budgeted cash receipts for the quarter. What is the expected amount of Accounts Receivable at the end of the quarter?
- Compute the number of prepaid assets that Johnson will use during the quarter.
- Compute Johnson’s budgeted cash disbursements for the quarter.
- Compute the total amount of expense Johnson expects to report on its income statement during the quarter.
- Prepare Johnson’s cash budget for the quarter.
- Estimate Johnson’s short-term borrowing requirements for the quarter.
- Assume you are the loan officer at Johnson’s bank and you review Johnson’s projections for the coming quarter. Would you be willing to approve a request from Johnson for a loan. Briefly explain your answer.
Intermediate Accounting
ISBN: 978-0324659139
11th edition
Authors: Loren A. Nikolai, John D. Bazley, Jefferson P. Jones