Problem
Silver Cloud Computing is a new company that provides cloud computing services. The company will begin operations on April 1, 2017. It acquired financing from the issuance of common stock for $75,000,000 and long-term debt for $50,000,000. The following projected income statement and balance sheet were prepared by the external accountant prior to the start of operations. All amounts are in thousands.
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Silver Cloud Computing
Projected Income Statement
First Year of Operations
(in thousands)
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Sales
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$400,000
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Expenses:
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Wages and salaries (includes CEO salary of $1,000)
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$125,000
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Bad debt expense
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1,500
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Depreciation
Marketing Expense
Occupancy Expense
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40,000
50,000
99,000
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Research and Development (includes R&D salaries & wages and other R&D expenditures)
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80,000
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Total Expenses
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395,500
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Operating income before bonus
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4,500
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Bonus
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225
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Operating income
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4,275
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Interest expense
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2,500
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Income before taxes
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1,775
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Income taxes (40%)
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710
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Net income
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$ 1,065
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Silver Cloud Computing
Projected Balance Sheet
March 31, 2018
(in thousands)
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Assets:
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Cash
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$ 2,430
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Accounts receivable, net of allowance of 4,000
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48,500
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Net computer equipment
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80,000
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Total assets
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$130,930
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Liabilities & Shareholders' Equity:
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Accounts payable
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$ 5,000
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Long-term debt
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50,000
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Common stock
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75,000
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Retained earnings
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930
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Total liabilities and shareholders' equity
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$130,930
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1. Decrease research and development expenditures from 20% of sales to 10% of sales.
2. Increase the estimated lives of the computer equipment from 3 years to 6 years.
3. Reduce the allowance for doubtful accounts from 10% of accounts receivable to 5% of accounts receivable.
4. Decrease marketing expense from 12.5% of sales to 8% of sales.
Additional notes:
The CEO's compensation package at Silver Cloud Computing is a $1,000,000 salary with a cash bonus of 5% of operating income before the bonus.
Original depreciation of the computers was calculated using straight-line depreciation over a 3 year period with no salvage value.