With new social distancing measure in place, Puzzle Mania Ltd. has noticed a significant increase in demand
Question:
With new social distancing measure in place, Puzzle Mania Ltd. has noticed a significant increase in demand for its colourful and challenging puzzles.To meet the anticipated sales increase, the controller has determined that the company will need additional funding.She has gathered the following information from the December 31, 2019 financial statements:
From the Income Statement:
2019 sales of $250,000
Earnings after tax of $137,500
From the Balance Sheet:
Current Assets$ 180,000Current liabilities$ 145,000
Plant and Equipment200,000Long-term liabilities135,000
Common shares40,000
Retained Earnings60,000
Total assets$ 380,000Total liabilities and equity $ 380,000
Puzzle Mania always maintains a dividend payout ratio of 30%. Based on predicted economic conditions it expects 2020 sales volume to increase by 25% and its profit margin to remain the same as in 2019.
The controller has asked you to use thepercentage of sales methodfor your calculations of the two independent scenarios below.Round your response to the nearest dollar.
a)Assume Puzzle Maniahasexcess plant capacity.Calculate the increase in retained earnings AND the required new funding(4 marks)
b)Assuming Puzzle Maniadoes not haveexcess plant capacity, calculate the required new funding.Note:They would require a $60,000 increase in net plant and equipment to accommodate the volume increase. (2 marks)
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley