Question

Jeremy Slacker started the Del Fuego Surf Shop on January 1 after determining that business school classes conflicted with his preferred activity. He invested $62,000 in the shop—$47,080 of his own savings and $31,000 borrowed from an acquaintance. The loan is to be repaid in 5 years. Jeremy will pay the lender annual interest at a rate of 8 percent.

Shortly after opening, Jeremy realized that he is not the best financial planner and has come to you for help. With some prodding, you are able to establish that Jeremy plans to sell only two models of surfboard, the Zuma and the Coronado, for at least the first year. Data on the boards are given as follows.

	Zuma			Coronado
Expected annual sales (units)		768			384
Retail price (per unit)	$	410		$	710
Purchase cost (per unit)		340			460

Additional information on the planned operations for the year includes the following.

1. Equipment costing $52,000 was purchased for cash when the store opened. The equipment will be depreciated over five years using straight-line depreciation.
2. Because of the fantastic weather in Del Fuego, Jeremy expects sales to occur uniformly over the year. Sales will be both for cash (60 percent) and on account (40 percent). Sales on account are assumed to be collected in two months.
3. Jeremy will maintain inventory equal to one-half of a month’s sales. All boards will be purchased from the manufacturer on credit with payment made one month after purchase.
4. Annual cash selling, general, and administrative expenses are $15,248 fixed plus 10 percent of revenues.
5. Jeremy’s tax rate is 40 percent.

Problem 13-63 (Algo) Budgeted Financial Statements in a Retail Firm (LO 13-6, 7)

Required:

a. Prepare an income statement for the year based on the data and assumptions available.
b. Prepare the year-end (December 31) balance sheet based on the data and assumptions available.

Answer 1

	JOURNAL ENTRIES:
	ACCOUNT TITLES	DEBIT	CREDIT
	Cash	$78,080
	Owners Equity		$47,080
	Loan		$31,000
	Interest Expense(8%*31000)	$2,480
	Interest Payable		$2,480
	Equipment	$52,000
	Cash		$52,000
	Depreciation Expenses(52000/5)	$10,400
	Accumulated Depreciation		$10,400
	Accounts Receivable	$39,168		(40%*587520*(2/12)	(Two months Credit Sales)
	Cash	$548,352
	Sales		$587,520
	Cost of goods sold	$437,760
	Inventory		$437,760
	Inventory	$492,480		(437760+(437760*(1.5/12)		(1.5 months of inventory)
	Accounts Payable		$41,040	(492480/12)
	Cash		$451,440
	Tax Expense	$25,152
	Taxes Payable		$25,152
	Selling ,general and admin expense	$74,000
	Cash		$74,000
	T- ACCOUNT
	CASH
	Description	Debit	Credit
	Owners Equity	$47,080
	Loan	$31,000
	Equipment		$52,000
	Sales	$548,352
	Purchase of inventory		$451,440
	Selling ,general and admin expense		$74,000						0
	Ending Balance	$48,992
									Sales Revenue=768*$410+384*$710= Cost of goods sold=768*$340+384* $460= Depreciation expense=$52000/5 Selling general and administrative expen $587,520 $437,760 $10,400 $74,000 ($15248+10%*587520) $587,520 $437,760 $149,760 INCOME STATEMENT Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Depreciation Expenses(52000/5) Selling general and admin expense Interest expense(8%*31000) Total Operating Expenses Income before tax Taxes(40%) Net Income $10,400 $74,000 $2,480 $86,880 $62,880 $25,152 $37,728 (492480-437760) $48,992 $39,168 $54,720 $142,880 $52,000 ($10,400) $184,480 BALANCE SHEET Assets: Cash Accounts Receivable Inventory Total Current assets Equipment Less: Accumulated Depreciation Total Assets Liabilities: Accounts Payable Interest Payable Taxes Payable Total Current Liabilities Long Term Liabilities Total Liabilities Equity: Owners Equity Retained Profit Total Equity Total Liabilities and Equity $41,040 $2,480 $25,152 $68,672 $31,000 $99,672 (Loan) $47,080 $37,728 $84,808 $184,480