Question

Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow:

• Sales are budgeted at $300,000 for November, $320,000 for December, and $220,000 for January.
• Collections are expected to be 70% in the month of sale and 30% in the month following the sale.
• The cost of goods sold is 75% of sales.
• The company desires to have an ending merchandise inventory at the end of each month equal to 80% of the next month's cost of goods sold. Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are $22,100.
• Monthly depreciation is $26,000.
• Ignore taxes.

Balance Sheet October 31
Assets
Cash	$	30,000
Accounts receivable		82,000
Merchandise inventory		180,000
Property, plant and equipment, net of $624,000 accumulated depreciation		1,014,000
Total assets	$	1,306,000
Liabilities and Stockholders' Equity
Accounts payable	$	246,000
Common stock		750,000
Retained earnings		310,000
Total liabilities and stockholders' equity	$	1,306,000

Retained earnings at the end of December would be:

Answer 1

Solution:

Total budgeted sales for November and December= $300,000 + $320,000

=$620,000

Cost of goods sold is 75% of sales

=$620,000*75%

=$465,000

Total gross profit for November and December

=$620,000 - $465,000

=$155,000

Total Net Income for November and December = Gross Profit - Depreciation - Other monthly expenses

=$155,000 - ($26,000*2) -($22,100*2)

=$155,000 -$52,000 - $44,200

=$58,800

Retained earnings at the end of December:

=Beginning retained earnings + Net income

=$310,000 + $58,800

=$368,800

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