Prepare a pro forma balance sheet for Amalgamated for next year using the percent-of-sales method and the information provided above

Amalgamated Enterprises is planning to purchase some new equipment. With this new equipment, the company expects sales to increase from $8,000,000 to $10,000,000. A portion of the financing for the purchase of the equipment will come from a $1,000,000 new common stock issue. The company knows that current assets, fixed assets, accounts payable, and accrued expenses increase in direct proportion with sales. The company's net profit margin on sales is 8%, and the company plans to pay 40% of its after-tax earnings in dividends. A copy of the company's current balance sheet is given below:

Amalgamated Enterprises Balance Sheet
Current assets $3,000,000
Fixed assets 12,000,000
Total assets $15,000,000
Accounts payable $4,000,000
Accrued expenses 1,000,000
Long-term debt 3,000,000
Common stock 2,000,000
Retained earnings 5,000,000
Total liabilities and net worth $15,000,000

Answer:
Amalgamated Enterprises
Pro Forma Balance Sheet

Projected
Present Percent Based on
Level of Sales of
(Mil) Sales $10 Mil
Current assets $2 .375 $3.75
Fixed assets 12 1.500 15.00
Total assets $15 $18.75
Accounts payable $4 .50 $5.00
Accrued expenses $1 .125 1.25
Long-term debt 3 a. 4.02d.
Common stock 2 a. 3.00b.
Retained earnings 5 a. 5.48c.
Total liabilities
and net worth $15 $18.75

Notes
a. Not applicable. These accounts are assumed not to vary directly with sales.
b. The company issued $1 million in new common stock.
c. The increase in retained earnings is equal to net profit minus dividends paid. Increase in retained earnings = (.08)($1M)(1 - .40) = $.48M
d. The long-term debt on the projected balance sheet is equal to total assets minus accounts payable, accrued expenses, common stock, and retained earnings. Long-term debt = $18.75M = $5.0M + $1.25M + $3.0M + $5.48M = $4.02M