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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Capital expenditures budget

On January 1, 20Y2, the controller of Omicron Inc. is planning capital expenditures for the years 20Y2-20Y5. The following interviews helped the controller collect the necessary information for the capital expenditures budget:

Director of Facilities A construction contract was signed in late 20Y1 for the construction of a new factory building at a contract cost of $10,000,000. The construction is scheduled to begin in 20Y2 and be completed in 20Y3.

Vice President of Manufacturing: Once the new factory building is finished, we plan to purchase $15 million m equipment in late 20Y3. I expect that an additional $200,000 will be needed early in the following year (20Y4) to test and install the equipment before we can begin production. If sales continue to grow, I expect we'll need to invest another $1,000,000 in equipment in 20Y5.

Chief Operating Officer: We have really been growing lately. I wouldn't be surprised if we need to expand the size of our new factory building in 20YS by at least 35%. Fortunately, we expect inflation to have minimal impact on construction costs over the next four years In addition. I would expect the cost of the expansion to be proportional to the size of the expansion.

Director of Information Systems: We need to upgrade our information systems to wireless network technology. It doesn't make sense to do this until after the new factory building is completed and producing product. During 20Y4, once the factory is up and running, we should equip the whole facility with wireless technology. I think it would cost us $800,000 today to install the technology. However, prices have been dropping by 25% per year, so it should be less expensive at a later date.

Chief Financial Officer: I am excited about our long-term prospects. My only short-term concern is managing our cash flow while we expend the $4,000,000 of construction costs on the portion of the new factory building scheduled to be completed m 20Y2.

Use this interview information to prepare a capital expenditures budget for Omicron Inc. for the years 20Y2-20Y5.

To determine

Budgeting is a process to prepare the financial statement by the manager to estimate the organization’s future actions. It is also helpful to satisfy the everyday activities.

To Compute: The capital expenditure budget.

Explanation

The following table shows the capital expenditure budget.

Company O

Capital Expenditure Budget

For the four years ending December 31, 20Y2 – 20Y5

Details 20Y2 20Y3 20Y4 20Y5
Building 4,000,000 6,000,000 3,500,000 (1)
Equipment 1,500,000 200,000 1,000,000
Information System 450,000 (2)
Total 4,000,000 7,500,000 650,000 4,500,000

Table (1)

Working Notes:

Calculate the amount of expenditure for building in the year 20Y5...

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