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 $297,000 for November, $317,000 for December, and $217,000 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 $21,800.
• Monthly depreciation is $24,500.
• Ignore taxes.

Balance Sheet October 31
Assets
Cash	$	28,500
Accounts receivable		80,500
Merchandise inventory		178,200
Property, plant and equipment, net of $624,000 accumulated depreciation		1,011,000
Total assets	$	1,298,200
Liabilities and Stockholders' Equity
Accounts payable	$	243,000
Common stock		747,000
Retained earnings		308,200
Total liabilities and stockholders' equity	$	1,298,200

Retained earnings at the end of December would be:

Answer 1

Solution: Net income in November: Net sales Less: Cost of goods sold ($297,000 x 75%) $222,750 $297,000 $74,250 Gross income Less: Other expenses $21,800 Less: Depreciation expenses Net income $24,500 $27,950 Net income in December: Net sales $317,000 Less: Cost of goods sold ($317,000 x 75%) $237,750 Gross income Less: Other expenses $79,250 $21,800 $24,500 Less: Depreciation expenses Net income $32,950 Retained earnings in December Retained earnings in October Net income in November Net income in December Retained earnings in December $308,200 $27,950 $32,950 $369,100