Question

Pendleton Company, a merchandising company, is developing its master budget for 2015. The income statement for 2014 is as follows:
Gross sales $2,000,000
Less: Estimated uncollectible accounts (40,000)
Net sales 1,960,000
Cost of goods sold (1,100,000)
Gross profit 860,000
Operating expenses (including $25,000 depreciation) (500,000)
Net income $360,000

The following are management’s goals and forecasts for 2015:

a. Selling prices will increase by 6 percent, and sales volume will increase by 4 percent.
b. The cost of merchandise will increase by 3 percent.
c. All operating expenses are fixed and are paid in the month incurred. Price increases for operating expenses will be 10 percent. The company uses straight-line depreciation.
d. The estimated uncollectibles are 2 percent of budgeted sales.

Required
Prepare a budgeted functional income statement for 2015.

Answer 1

Answer:

Budgeted functional income statement for 2015

Gross sales ($2,000,000  × 1.04 × 1.06)                                       $2,204,800

Less: Estimated uncollectible accounts ($2,204,800 × 2 %)         ($44,096)

Net sales                                                                                        $2,160,704

Cost of goods sold (1,100,000 × 1.03)                                          ($1,133,000)

Gross profit                                                                                     $1,027,704

Operating expenses (475,000 × 1.10)                                            ($522,500)

Depreciation                                                                                     ($25,000)

Net income                                                                                       $480,204

Explanation:

Make the adjustments stated on the 2014 Income Statement.

For Operating Expenses, it is wise to first remove the depreciation expense and apply the increment of 10% to reflect Operating Costs for 2015.

Treat Depreciation Expense separately and at the same amount as for 2014, since depreciation is calculated on straight line method.