Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

-Banner's projected fixed assets for 2005 are:
A)$1,120,000.
B)$1,260,000.
C)$1,000,000.
D)$2,380,000.

Question

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )
 
-Banner's projected fixed assets for 2005 are:
A)$1,120,000. 
B)$1,260,000. 
C)$1,000,000. 
D)$2,380,000.

Quizplus · Accepted Answer

Using the percent-of-sales method, we can calculate the projected net income for 2005 as follows:

Projected Net Income = Projected Sales x Percent of Net Income 
Projected Net Income = $2,000,000 x 4% 
Projected Net Income = $80,000

We can then use the dividend payout ratio formula to calculate the projected earnings available for investment in fixed assets:

Projected Earnings Available for Investment = Projected Net Income - Dividends 
Projected Earnings Available for Investment = $80,000 - $90,000 
Projected Earnings Available for Investment = -$10,000

Since the projected earnings available for investment are negative, Banner will not be able to invest in fixed assets in 2005. Therefore, the only fixed assets Projection will have are the ones already on their balance sheet, which are $1,260,000. Hence, the answer is B.

Use the Following Information and the Percent-Of-Sales Method to Answer