Question

Alpaca Corporation had revenues of $245,000 in its first year of operations. The company has not collected on $18,800 of its sales and still owes $26,900 on $95,500 of merchandise it purchased. The company had no inventory on hand at the end of the year. The company paid $12,600 in salaries. Owners invested $13,500 in the business and $13,500 was borrowed on a five-year note. The company paid $3,800 in interest that was the amount owed for the year, and paid $7,800 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%. (Assume taxes are paid in the same year). Compute the cash balance at the end of the first year for Alpaca Corporation.

Answer 1

The cash balance at the end of the first year for Alpaca Corporation is $95,220.

Step-by-step explanation:

Before the cash balance at the end of the first year, the following are first computed:

Insurance for the year = Amount paid for a two-year insurance policy / 2 = $7,800 / 2 = $3,900

Profit before tax = Revenue – Merchandise purchased – Salaries – Interest for the year – Insurance for the year = $245,000 - $95,500 - $12,600 - $3,800 - $3,900 = $129,200

Tax paid = Profit before tax * Tax rate = $129,200 * 40% = $51,680

Cash collected on sales = Revenue – Amount not yet collected on sales = $245,000 - $18,800 = $226,200

Cash paid on merchandise purchased = Merchandise purchased – Amount being owed on merchandise purchased = $95,500 - $26,900 = $68,600

The cash balance at the end of the first year can now be computed as follows:

Cash balance at the end of the first year = Amount invested by the owners in the business + Cash collected on sales - Cash paid on merchandise purchased - Amount paid for a two-year insurance policy - Tax paid - Salaries – Interest for paid = $13,500 + $226,200 - $68,600 - $7,800 - $51,680 - $12,600 - $3,800 = $95,220

Therefore, the cash balance at the end of the first year for Alpaca Corporation is $95,220.