The balance sheet of Watson Company as of December 31, 19X1, follows. WATSON COM

Question

The balance sheet of Watson Company as of December 31, 19X1, follows. WATSON COMPANY Balance Sheet December 31, 19X1 Assets Cash Accounts receivable Finished goods (575 units x $7.00) Direct materials (2,760 units x $0.50) Plant & equipment $50,000 Less: Accumulated depreciation 10,000 Total assets Liabilities & Stockholders' Equity Accounts payable to suppliers Common stock $25,000 Retained earnings 21,000 Total liabilities &. stockholders' equity The following information has been extracted from the firm's accounting records: 1.All sales are made on account at $20 per unit. Sixty percent of the sales are collected in the month of sale; the remaining 40% are collected in the following month. Forecasted sales for the first five months of 19X2 are: January, 1,500 units,- February, 1,600 units; March, 1,800 units; April, 2,000 units; May, 2,100 units. 2.Management wants to maintain the finished goods inventory at 30% of the following month's sales. 3.Watson uses four units of direct material in each finished unit. The direct material price has been stable and is expected to remain so over the next six months. Management wants to maintain the ending direct materials inventory at 60% of the following month's production needs. 4.Seventy percent of all purchases are paid in the month of purchase; the remaining 30% are paid in the subsequent month. 5.Watson's product requires 30 minutes of direct labor time. Each hour of direct labor costs $7. Instructions: a.Rounding computations to the nearest dollar, prepare the following for January through March: 1) Sales budget 2) Schedule of cash collections 3) Production budget 4) Direct material purchases budget 5) Schedule of cash disbursements for material purchases 6) Direct labor budget b.Determine the balances in the following accounts as of March 31: 1) Accounts Receivable 2) Direct Materials 3) Accounts Payable

Explanation / Answer

EXHIBIT 13.1 MILAVEC COMPANY Income Statements and Statements of Retained Earnings For the Years Ending December 31 2010 2009 Sales $900,000 $800,000 Cost of goods sold Beginning inventory 43,000 40,000 Purchases 637,000 483,000 Goods available for sale 680,000 523,000 Ending inventory 70,000 43,000 Cost of goods sold 610,000 480,000 Gross margin 290,000 320,000 Operating expenses 248,000 280,000 Income before taxes 42,000 40,000 Income taxes 17,000 18,000 Net income 25,000 22,000 Plus: Retained earnings, beginning balance 137,000 130,000 Less: Dividends 0 15,000 Retained earnings, ending balance $162,000 $137,000 EXHIBIT 13.2 MILAVEC COMPANY Balance Sheets As of December 31 2010 2009 Assets Cash $ 20,000 $ 17,000 Marketable securities 20,000 22,000 Notes receivable 4,000 3,000 Accounts receivable 50,000 56,000 Merchandise inventory 70,000 43,000 Prepaid expenses 4,000 4,000 Property, plant, and equipment (net) 340,000 310,000 Total assets $508,000 $455,000 Liabilities and Stockholders’ Equity Accounts payable $ 40,000 $ 38,000 Salaries payable 2,000 3,000 Taxes payable 4,000 2,000 Bonds payable, 8% 100,000 100,000 Preferred stock, 6%, $100 par, cumulative 50,000 50,000 Common stock, $10 par 150,000 125,000 Retained earnings 162,000 137,000 Total liabilities and stockholders’ equity $508,000Sales $900,000 $800,000 112.5%* Cost of goods sold 610,000 480,000 127.1 Gross margin 290,000 320,000 29.4 Operating expenses 248,000 280,000 211.4 Income before taxes 42,000 40,000 15.0 Income taxes 17,000 18,000 25.6 Net income $ 25,000 $ 22,000 113.6

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