Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

-Richmond's projected fixed assets for 2018 are
A)$1,120,000.
B)$1,260,000.
C)$1,000,000.
D)$2,380,000.

Question

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017
 
-Richmond's projected fixed assets for 2018 are
A)$1,120,000. 
B)$1,260,000. 
C)$1,000,000. 
D)$2,380,000.

Quizplus · Accepted Answer

We can use the percentage-of-sales method to forecast the fixed assets for 2018:
Projected Net Income = 4% of Projected Sales
Projected Net Income = 0.04 x $2,000,000 = $80,000
Retained Earnings = $375,000
Add: Net Income - Dividends = $375,000 + $80,000 - $90,000 = $365,000
Total Assets = Total Liabilities and Equity = $1,500,000
Minus: Current Assets = $400,000
Minus: Total Liabilities = $300,000
Equals: Total Fixed Assets = $800,000
Thus, the projected fixed assets for 2018 are $800,000. But this only considers the increase in sales and the projected net income, and not any additional investment in fixed assets. Therefore, we need to add the expected investment in fixed assets to this amount. Let's assume that Richmond plans to maintain the same fixed assets-to-sales ratio in 2018 as it did in 2017 (which was 50%):
Fixed Assets-to-Sales Ratio = Total Fixed Assets / Sales = $800,000 / $1,600,000 = 50%
Projected Fixed Assets = Projected Sales x Fixed Assets-to-Sales Ratio
Projected Fixed Assets = $2,000,000 x 50% = $1,000,000
Therefore, the best choice is B) $1,260,000, which is the sum of the projected fixed assets ($1,000,000) and the existing fixed assets ($260,000).

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