Figure 8-7
Macheski Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly master budget. Data for the July master budget are given below:
The June 30th balance sheet follows:
Actual sales for June and budgeted sales for July, August, and September are given below:
Sales are 20 percent for cash and 80 percent on credit. All credit sales are collected in the month following the
sale. There are no bad debts.
The gross margin percentage is 40 percent of sales. The desired ending inventory is equal to 25 percent of the following month's sales. One fourth of the purchases are paid for in the month of purchase and the others are purchased on account and paid in full the following month.
The monthly cash operating expenses are $43,000, and the monthly depreciation expenses are $7,000.
-Refer to Figure 8-7. What is the balance of the retained earnings account at the end of July?

Question

Figure 8-7
Macheski Company, an importer and retailer of Polish pottery and kitchenware, prepares a monthly master budget. Data for the July master budget are given below:
The June 30th balance sheet follows:
  Actual sales for June and budgeted sales for July, August, and September are given below:
  Sales are 20 percent for cash and 80 percent on credit. All credit sales are collected in the month following the
sale. There are no bad debts.
The gross margin percentage is 40 percent of sales. The desired ending inventory is equal to 25 percent of the following month's sales. One fourth of the purchases are paid for in the month of purchase and the others are purchased on account and paid in full the following month.
The monthly cash operating expenses are $43,000, and the monthly depreciation expenses are $7,000.
-Refer to Figure 8-7. What is the balance of the retained earnings account at the end of July?

Quizplus · Accepted Answer

To calculate the balance of the retained earnings account at the end of July, we need to determine the net income for the month of July by subtracting the total expenses from the total revenue.

First, we need to calculate the total sales revenue for the month of July:

Total Sales Revenue = Budgeted Sales for July * Gross Margin Percentage
Total Sales Revenue = $450,000 * 40% = $180,000

Next, we can calculate the total cash sales revenue for the month of July:

Total Cash Sales Revenue = Total Sales Revenue * 20%
Total Cash Sales Revenue = $180,000 * 20% = $36,000

The remaining sales revenue must be collected in the following month, so it does not affect the cash balance for July.

We can now calculate the total credit sales revenue for the month of July:

Total Credit Sales Revenue = Total Sales Revenue - Total Cash Sales Revenue
Total Credit Sales Revenue = $180,000 - $36,000 = $144,000

We know that all credit sales are collected in the following month, so the total collections from credit sales in July would be:

Total Collections from Credit Sales in July = Credit Sales for June
Total Collections from Credit Sales in July = $405,000

We can now calculate the total revenue for the month of July:

Total Revenue = Total Cash Sales Revenue + Total Collections from Credit Sales in July
Total Revenue = $36,000 + $405,000 = $441,000

Next, we need to calculate the cost of goods sold for the month of July:

Cost of Goods Sold = Total Sales Revenue * (1 - Gross Margin Percentage)
Cost of Goods Sold = $180,000 * (1 - 40%) = $108,000

We can now calculate the gross profit for the month of July:

Gross Profit = Total Sales Revenue - Cost of Goods Sold
Gross Profit = $180,000 - $108,000 = $72,000

Next, we need to calculate the ending inventory for August:

Ending Inventory for August = Budgeted Sales for September * Desired Ending Inventory
Ending Inventory for August = $480,000 * 25% = $120,000

We can now calculate the cost of goods sold for August:

Cost of Goods Sold for August = Budgeted Sales for August * (1 - Gross Margin Percentage) + Ending Inventory for August - Beginning Inventory for August
Cost of Goods Sold for August = $450,000 * (1 - 40%) + $120,000 - $108,000 = $192,000

We can now calculate the total purchases for the month of July:

Total Purchases for July = Cost of Goods Sold for August + Ending Inventory for July - Beginning Inventory for July
Total Purchases for July = $192,000 + ($480,000 * 25%) - ($450,000 * 25%) = $132,000

We know that one fourth of the purchases are paid for in the month of purchase, and the remainder is paid the following month. Therefore, the cash payments for July would be:

Cash Payments for Purchases in July = Total Purchases for July * 25%
Cash Payments for Purchases in July = $132,000 * 25% = $33,000

The remaining purchases are paid the following month and do not affect the cash balance for July.

Next, we need to calculate the total operating expenses for the month of July:

Total Operating Expenses = Cash Operating Expenses + Depreciation Expenses
Total Operating Expenses = $43,000 + $7,000 = $50,000

We can now calculate the net income for the month of July:

Net Income = Gross Profit - Total Operating Expenses
Net Income = $72,000 - $50,000 = $22,000

Finally, we can calculate the balance of the retained earnings account at the end of July:

Balance of Retained Earnings at the End of July = Beginning Retained Earnings + Net Income for July
Balance of Retained Earnings at the End of July = $166,000 + $22,000 = $188,000

Therefore, the answer is B) $188,000.

Figure 8-7 Macheski Company, an Importer and Retailer of Polish Pottery and Pottery