Chapter 7, Problem 26E

To determine

Budgeted Income Statement:

It is the statement which presents the budgeted sales and expenses of an entity of a particular period. It is an estimated income statement of future period.

To Prepare: Budgeted Income Statement and Budgeted balance sheet.

Explanation of Solution

Company A
Budgeted Income Statement
Particulars	July Amount ($)
Sales (Given)	1,400,000
Less: Cost of goods sold (working note 1)	770,000
Gross profit $\left[\text{A}\right]$	630,000
Less: Expenses:
Salaries (working note 2)	285,000
Depreciation (Given)	36,000
Other expenses (Given)	200,000
Interest on loan (Given)	6,600
Total expenses $\left[\text{B}\right]$	527,600
Income before taxes	102,400
Less: Income tax@30% (Working Note 3)	30,720
Net income after taxes	71,680
Table (1)

Working Note 1:

Formula to calculate cost of goods sold,

$\text{Cost of goods sold}=\text{Sales}\times \text{55\%}$

Sale is $1,400,000(given).

Substitute $1,400,000 for sales,

$\begin{array}{c}\text{Cost of goods sold}=\$1,400,000\times \text{55\%}\\ =\text{\$770,000}\end{array}$

Working Note 2:

Calculation of salaries,

Given,
Cash paid for salaries is $275,000.
Salary of June is $50,000.
Salary of July is $60,000.

$\begin{array}{c}\text{Salaries for July}=\left(\begin{array}{l}\text{Salaries paid}+\text{closing balance of salary}\\ -\text{opening balance of salary}\end{array}\right)\\ =\text{\$275,000}+\text{\$60,000}-\text{\$50,000}\\ =\text{\$285,000}\end{array}$

Working Note 3:

Calculation of income tax,

Given,
Income before tax is $102,400.
Rate of income tax is 30%.

$\begin{array}{c}\text{Income tax}=\text{Net income before taxes}\times \text{rate of tax}\\ =\text{\$102,400}\times \text{30\%}\text{.}\\ =\text{\$30,720}\end{array}$

Company A
Balance sheet for the month ended 31st July
Particulars	Amount ($)	Amount ($)
Assets:
Cash (working note 4)	122,400
Account receivable (working note 5)	1,220,000
Merchandise inventory (given)	60,000
Total current assets		1,402,000
Equipment (given)	1,600,000
Less: Accumulated depreciation	316,000	1,284,000
Total Assets		2,686,400
Liabilities and Equities:
Account payable (working note 8)	300,000
Salaries payable (given)	60,000
Income tax payable (Working Note 3)	30,720
Total Current liabilities		390,720
Bank loan (given)		660,000
Total liabilities		1,050,720
Common stock (given)	600,000
Retained earnings (working note 9)	1,035,680
Total stakeholder’s equity		1,635,680
Total Liabilities and Equities		2,686,400
Table (2)

Working Note 4:

Company A
Cash
Particulars	July Amount ($)
Beginning cash balance	50,000
Add: Cash receipts (working note 7)	1,364,000
Total cash available$\left[\text{A}\right]$	1,414,000
Less: Cash disbursement
Payments for purchases (working note 6)	730,000
Salaries	275,000
Other expense	200,000
Accrued taxes	80,000
Interest on loan	6,600
Total Cash disbursement $\left[\text{B}\right]$	1,291,600
Ending cash balance $\left[\text{A}-\text{B}\right]$	122,400
Table (3)

Working Note 5:

Calculation of account receivables,

$\begin{array}{c}\text{Account receivable}=\left(\mathrm{P}\text{revious month sale}\times \text{20\%}\right)+\left(\text{Current month sale }\times \text{70\%}\right)\\ =\left(\$1,200,000\times 20\%\right)+\left(\$1,400,000\times 70\%\right)\\ =\$240,000+\$980,000\\ =\$1,220,000\end{array}$

Working Note 6:

Payments for purchases
Particulars	July Amount ($)
June purchases $\left(700,000\times 40\%\right)$	280,000
July purchases $\left(750,000\times 60\%\right)$	450,000
Total	730,000
Table (4)

Working Note 7:

Cash receipts from sales
Particulars	July Amount ($)
May sales $\left(1,720,000\times 20\%\right)$	344,000
June sales $\left(1,200,000\times 50\%\right)$	600,000
July sales $\left(1,400,000\times 30\%\right)$	420,000
Total	1,364,000
Table (5)

Working Note 8:

Calculation of account payables,

$\begin{array}{c}\text{Account payable}=\text{Current month purchase}\times \text{40\%}\\ =\text{\$750,000}\times \text{40\%}\\ =\text{\$300,000}\end{array}$

Working Note 9:

Company A
Retained earnings
Particulars	July Amount ($)
Beginning retained earnings (Given)	964,000
Add: Net income	71,680
Ending retained earnings	1,035,680
Table (6)