Directions: Compile the information for the ending balance sheet as of December 31, 2020 Company History and Sales Projections 

Retro Vinyl (RV) produces bespoke cabinetry for vinyl record players in Santa Fe, New Mexico. The company utilizes the heart of pine wood to manufacture truly unique furniture that not only looks beautiful but sounds amazing as well.

The proprietors of RV have spent the last 30 years in the business of remodeling and design of furniture. As such, the owners of RV engage in all aspects of the company including the design, drafting, and project management. Recognizing a new niche market related to the rise in vinyl record sales, the proprietors of RV launched the company in August of 2020 with the intent to begin production and distribution of the cabinets across the country in the first quarter of 2021. Together, one partner contributes $500,000 in cash in exchange for company stock while an additional partner contributes land and a building in exchange for $500,000 in company stock. The land has a market value of $80,000 while the historical cost of the building is noted at $520,000 with $100,000 in accumulated depreciation.

Although the sales team has worked diligently to gain an early foothold in the market, the company is bracing for disparate orders for the cabinets throughout fiscal year 2021 as the product has

relatively little regional or national notoriety given the relative age of the business. However, the company has secured a contract with a national furniture store that has agreed to purchase 200 units for each quarter in 2021 as well as the first quarter of 2022. The company expects local and regional advertising will also prompt other retailers to place orders for the cabinets. As such, management forecasts sales in units (cabinets) for the next five quarters are as follows: 200 units (Q1 2021), 210 units (Q2 2021), 225 units (Q3 2021), 245 units (Q4 2021), and 270 (Q1 2022). The total sales price for each artisan cabinet is $850.

Treasury Management 

RVs collection practices maintains all sales on credit, with no discounts, due in 30 days. Despite the 30-day due date, the owners note that in their previous furniture manufacturing experience only 75 percent of a quarters sales are collected by quarter-end. Another 20 percent is collected in the following quarter and the remaining 5 percent is collected in the following quarter. Given the current scale of sales and operations, bad debt is negligible and ignored.

Related to payment of RVs materials suppliers and the 60 day credit terms typically afforded in the industry, the company expects to remit cash for purchases of raw materials at a rate of 30 percent in the quarter of purchase with the remaining 70 percent in the following quarter. All other operating expenses are paid in cash during the quarter in which they are incurred.

The owners established the cash policies of RV to safely maximize profitability. Management requires a minimum ending cash balance for each quarter of $10,000. The company has a credit facility with First National Bank of New Mexico based in Albuquerque. First National has extended a $75,000 line-of-credit in order to assist RV in attaining additional cash proceeds as necessary. RV borrows at the beginning of each quarter, and at the end of the year, the company repays the short-term loan to First National Bank of New Mexico, with the assumption that the company retains at least $10,000 in cash. The interest rate on the credit facility is 5.75% per quarter (assume simple, not compounding, interest). Should RV draw down on the credit facility, the company has also elected to pay interest to First National Bank of New Mexico for all borrowings at the end of the fiscal year. In other words, the interest related to a cash draw in January is paid at the end of the fourth quarter of 2021. Further, the company plans to declare and pay a quarterly dividend of $12,000.

Production and Procurement 

The contract with RVs clients maintain that the company must fulfill orders within ten business days of order receipt. Thereto, RV keeps a modest level of inventory on hand. For budgeting purposes, RV plans to construct enough cabinets during each quarter such that the ending balance of cabinets each quarter will meet 20 percent of sales projections for the next quarter. Regarding production of the cabinets, each requires approximately 10 board feet of heart of pine wood at a cost of $31.00 per board foot of heart of pine (direct materials). Since RV procures its heart of pine wood from a reclaimed wood specialist in Hyannis, Massachusetts, it typically takes up to ten business days for the wood to arrive. As a result, RV intends to consistently retain 20 percent of the next quarters production needs in its ending inventory balance for heart of pine wood. Also of note, during the first quarter of 2022, the company expects 2,700 board feet of heart of pine wood will be required for production. Specific to skilled labor, the assembly of one cabinet requires 4 hours for completion. The skilled woodworkers are paid a wage of $42 per direct labor hour worked. Further, RV estimates manufacturing overhead at $5.00 per direct labor hour for variable manufacturing overhead with $7,500 in fixed manufacturing overhead per quarter prior to any new capital investment. This includes $3,500 of depreciation expense that will be recognized each quarter when production begins in the first quarter of 2021.

Capital Assets and Other Expenses 

Related to capital assets, RV will complete renovations to the building in April, which will now have a warehouse appended to the north end of the building. The total cost of the renovation will be paid in cash ($450,000). Depreciation of the warehouse will be treated as a period cost. Further, RV will also purchase accounting and logistics software to facilitate control of operations in July for $35,000. The company also plans to pay for the software in cash. Depreciation expense on the newly acquired assets should be made as an adjustment at the end of the corresponding quarter for which RV places the asset into service. A full month of depreciation expense should be recorded for both April (warehouse) and July (software). RV will depreciate the newly acquired assets using the straight-line method for 15 years (warehouse) and 5 years (software).

RV also has quarterly operating expenses for each quarter as follows. Variable SGA expense is recognized at $2 per cabinet while RV has fixed quarterly SGA of $30,000 (executive salaries), advertising expense ($15,000), and insurance expense of $3,000. All SGA expense is paid in full during each quarter.

Directions: Compile the information for the ending balance sheet as of December 31, 2020