Alpaca Corporation had revenues of $200,000 in its first year of operations. They have not collected on $20,000 of their sales, and still owe $25,000 on $70,000 of merchandise they purchased. The company had no inventory on hand at the end of the year. The company paid $15,000 in salaries. Owners invested $20,000 in the business and $20,000 was borrowed on a five-year note. The company paid $2,000 in interest that was the amount owed for the year, and paid $6,000 for a two-year insurance policy on the first day of business. Alpaca has an effective income tax rate of 40%. Compute the cash balance at the end of the first year for Alpaca Corporation.

Closing balance $110000

Explanation:

The computation of the cash balance at the end of the first year is shown below:

Funds raised from owners $20000

Less: Funds borrowed $20,000

Collection from debtors $180,000 ($200,000 - $20,000 )

Less: Payment for merchandise $45000

Salaries paid $15000

Interest paid $2000

Insurance policy paid $6000

Income tax  at 40% $42000

Closing balance $110000

Working note:

Calculation of tax paid

Sales 200000

Less: purchases 75000

salary 15000

interest 2000

insurance(50% of 6000) 3000

Income 105000

Tax at 40% 42000

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