Bracken Corporation is a small wholesaler of gourmet food products. Data regardi

Question

Bracken Corporation is a small wholesaler of gourmet food products. Data regarding the store's operations follow: • Sales are budgeted at $320,000 for November, $330,000 for December, and $330,000 for January. • Collections are expected to be 80% in the month of sale, 17% in the month following the sale, and 3% uncollectible. • The cost of goods sold is 75% of sales. • The company would like to maintain ending merchandise inventories equal to 65% of the next month's cost of goods sold. Payment for merchandise is made in the month following the purchase. • Other monthly expenses to be paid in cash are $21,700. • Monthly depreciation is $18,900. • Ignore taxes. Balance Sheet October 31 Assets Cash $41,000 Accounts receivable, net of allowance for uncollectible accounts 89,000 Merchandise inventory 156,000 Property, plant and equipment, net of $617,000 accumulated depreciation 1,235,000 Total assets $1,521,000 Liabilities and Stockholders' Equity Accounts payable $182,500 Common stock 970,000 Retained earnings 368,500 Total liabilities and stockholders' equity $1,521,000 The cost of December merchandise purchases would be: $41,000 $160,875 $247,500 $89,000

Explanation / Answer

To solve this problem we will use the formula: Beginning inventory+purchases - ending inventory = cost of goods sold.

Cost of goods sold = 75% of that month's sales. So, for November it will be = 0.75*320,000 = 240,000and similarly for December and January.

Ending inventory = 65% of next month's COGS. So, for November it will be = 0.65*December's COGS = 0.65*247500 = 160,875.

Ending inventory for October = Beginning inventory for November.

Now, the formula = Beginning inventory+purchases - ending inventory = cost of goods sold.

Or, purchases = COGS+ending inventory-beginning inventory

Purchase for December = 247,500 (December's COGS) +160,875 (December's ending inventory) - 160,875 (December's opening inventory) = $247,500

November December January Sales 320,000 330,000 330,000 Cost of goods sold (75% of sales) 240,000 247,500 247,500 Ending inventory (65% of next month's COGS) 160,875 160,875 Opening inventory 156,000 160,875 160,875 Purchase 244,875 247,500

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