Question Nos.

39 through 45 are based on the following data:

The Ingo Corporation makes standard-size 2-inch fasteners, which it sells for P155 per thousand. Irine Tee, the
major stockholder, manages the inventory and finances of the company. She estimates sales for the following
months to be:

January P263,500 (1,700,000 fasteners)

February P186,000 (1,200,000 fasteners)
March P217,000 (1,400,000 fasteners)
April P310,000 (2,000,000 fasteners)
May P387,500 (2,500,000 fasteners)

Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December (1,500,000
fasteners).

Ms. Tee is preparing for a meeting with Peninsula Banking Corporation to arrange the financing for the first
quarter. Based on her sales forecast and the following information she has provided, you have to prepare a
monthly cash budget, a monthly and quarterly pro forma income statement, a pro forma quarterly balance sheet,
and all necessary supporting schedules for the first quarter.

Past history shows that Ingo Corporation collects 50 percent of its accounts receivable in the normal 30-day
credit period (the month after the sale) and the other 50 percent in 60 days (two months after the sale). It pays for
its materials 30 days after receipt. In general, Ms. Tee likes to keep a two-month supply of inventory in
anticipation of sales. Inventory at the beginning of December was 2,600,000 units. (This was not equal to her
desired two-month supply.)

The major cost of production is the purchase of raw materials in the form of steel rods, which are cut, threaded,
and finished. Last year raw material costs were P52 per 1,000 fasteners, but Ms. Tee has just been notified that
material costs have risen, effective January 1, to P60 per 1,000 fasteners. The Ingo Corporation uses FIFO
inventory accounting. Labor costs are relatively constant at P20 per thousand fasteners, since workers are paid
on a piecework basis. Overhead is allocated at P10 per thousand units, and selling and administrative expense is
20 percent of sales. Labor expense and overhead are direct cash outflows paid in the month incurred, while
interest and taxes are paid quarterly.

The corporation usually maintains a minimum cash balance of P25,000, and it puts its excess cash into
marketable securities. The average tax rate is 40 percent, and the company usually pays out 50 percent of net
income in dividends to stockholders. Marketable securities are sold before funds are borrowed when a cash
shortage is faced. Ignore the interest on any short-term borrowings. Interest on the long-term debt is paid in
March, as are taxes and dividends.

As of year-end, the Ingo Corporation balance sheet was as follows:

Ingo Corporation
Balance Sheet
December 31, 2006

ASSETS
Current assets:
Cash P 30,000
Accounts receivable 320,000
Inventory 237,800
Total current assets 587,800
Plant and equipment, net of accumulated depreciation of P200,000 800,000
Total Assets P1,387,800

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable P 93,600
 Long-term debt, 8% 400,000
Common stock 504,200
Retained earnings 390,000
Total Liabilities and Stockholders’ Equity P1,387,800
i
. The budgeted production respective to each month of the first quarter of the coming year are:
A. 1,400,000; 2,000,000; 2,500,000 C. 2,500,000; 2,000,000; 1,400,000
B. 1,400,000; 2,500,000; 2,000,000 D. 2,000,000; 1,400,000; 2,500,000
ii
. The amount of accounts payable paid in March for the purchase of materials is:
A. P150,000 C. P104,000
B. P120,000 D. P130,000
iii
. The expected cash collections on accounts receivable in the month of February are:
A. P224,750 C. P 93,000
B. P248,000 D. P186,000
iv
. The amount of accounts receivable outstanding as of March 31, 2007 is:
A. P217,000 C. P310,000
B. P224,750 D. P108,500
v
. The cost of goods sold for the first quarter of the coming year amounts to:
A. P363,800 C. P426,400
B. P453,600 D. P373,400
vi
. The total cash and marketable securities as of January 31 will be:
A. P45,450 C. P91,800
B. P25,000 D. P54,450
vii
. The expected net income during the first quarter of the coming year is:
A. P 91,080 C. P 96,840
B. P161,400 D. P151,800
i
.Answer: A
Budgeted Production
January February March Total
Sales 1,700,000 1,200,000 1,400,000 4,300,000
Inventory, end 2,600,000 3,400,000 4,500,000 4,500,000
Total 4,300,000 4,600,000 5,900,000 8,800,000
Inventory, beg. (2,900,000 (2,600,000 (3,400,000 (2,900,000
Budgeted production 1,400,000 2,000,000 2,500,000 5,900,000

ii
.Answer: B
Payments for Purchases:
January (December purchases - 1,800,000 x 0.052) P 93,600
February (January purchases – 1,400,000 x 0.06) 84,000
March (February purchases – 2,000,000 x 0.06) 120,000
Total for the quarter P297,600

iii
.Answer: B
Budgeted Collections on Accounts Receivable
January February March Total
November sales 87,500 87,500
December sales 116,250 116,250 232,500
January sales 131,750 131,750 263,500
February sales 93,000 93,000
Total 203,750 248,000 224,750 676,500

iv
.Answer: C
A month’s sales is collected 50 percent each in the first and second month. Therefore, the accounts receivable
outstanding as of March 31 includes March’s sales as well as 50 percent of February sales.
February’s accounts (P186,000 x 0.5) P 93,000
March’s sales 217,000
Outstanding accounts receivable, March 31 P310,000

v
.Answer: A
Current unit cost per 1,000
Material P 52
Labor 20
Overhead 10
Total P 82

Effective January 1, 2007, the price of materials will be raised to P60. The unit cost for 2007 production will be P90.
Since the sales of January and February come from December production, only the March sales will have cost of
P90 per thousand.

January and February cost of goods sold (1,700 + 1,200) x P82 P237,800
March 1,400 x P90 126,000
Cost of goods sold (first quarter) P363,800

vi
.Answer: A
January February March
Cash collections 203,750 248,000 224,750
Cash disbursements
Payments for materials 93,600 84,000 120,000
Labor expenses 28,000 40,000 50,000
Overhead 14,000 20,000 25,000
Selling & administrative 52,700 37,200 43,400
Interest 8,000
vii
.Answer: C
Proforma Income Statement
January February March Total
Sales 263,500 186,000 217,000 666,500
Cost of goods sold 139,400 98,400 126,000 363,800
Gross profit 124,100 87,600 91,000 302,700
Selling expenses, 20% 52,700 37,200 43,400 133,300
Operating income 71,400 50,400 47,600 169,400
Interest expense 2,667 2,667 2,666 8,000
Income before tax 68,733 47,733 44,934 161,400
Income tax, 40% 27,493 19,093 17,974 64,560
Net income 41,240 28,640 26,960 96,840

Problem2
Atlantic Corporation assembles bicycles by purchasing frames, wheels, and other parts from various
suppliers. Consider the following data:
 The company plans to sell 25,000 bicycles during each month of the year's first quarter.
 A review of the accounting records disclosed a finished-goods inventory of 1,400 bicycles on
January 1 and an expected finished-goods inventory of 1,850 bicycles on January 31.
 Atlantic has 4,300 wheels in inventory on January 1, a level that is expected to drop by 5% at
month-end.
 Assembly time totals 30 minutes per bicycle, and workers are paid $14 per hour.
 Atlantic accounts for employee benefits as a component of direct labor cost. Pension and
insurance costs average $2 per hour (total); additionally, the company pays Social Security taxes
that amount to 8% of gross wages earned.

Required:
A. How many bicycles does Atlantic expect to produce (i.e., assemble) in January?
B. How many wheels must be purchased to satisfy production needs?
C. Compute Atlantic's total direct labor cost.
D. Briefly explain how the company's purchasing activity would affect the end-of-period balance
sheet.

LO: 4 Type: A, N

Answer:
A. Finished-goods inventory is expected to increase by 450 units (1,850 - 1,400). Thus, the
company will assemble 25,450 bicycles (25,000 + 450).

B. Atlantic's production will require 50,900 wheels (25,450 x 2). Given that inventory will
drop by 215 units (4,300 x 5%), the company must purchase 50,685 wheels (50,900 - 215).

C. Assembly time: 25,450 bicycles x 30/60 = 12,725 hours

Labor cost:
Wages: 12,725 hours x $14 $178,150
Pension and insurance: 12,725 hours x $2 25,450
Social Security taxes: $178,150 x 8% 14,252
Total $217,852

D. Purchasing activity would likely affect the balance sheet in several ways. Atlantic's Cash
account would decrease and any end-of-period obligations to suppliers would be disclosed
as accounts payable. In addition, the wheels on hand at the end of the period would affect
raw-material inventories, and the cost of wheels acquired and used would influence the
ending inventory of bicycles.