Problem 7-8AA Merchandising: Preparation of a complete master budget LO P4 Near
ID: 2592107 • Letter: P
Question
Problem 7-8AA Merchandising: Preparation of a complete master budget LO P4
Near the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017.
To prepare a master budget for January, February, and March of 2018, management gathers the following information.
The company’s single product is purchased for $30 per unit and resold for $54 per unit. The expected inventory level of 5,250 units on December 31, 2017, is more than management’s desired level, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,500 units; February, 8,750 units; March, 10,500 units; and April, 10,500 units.
Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 57% is collected in the first month after the month of sale and 43% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $120,000 is collected in January and the remaining $400,000 is collected in February.
Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2017, accounts payable balance, $75,000 is paid in January and the remaining $280,000 is paid in February.
Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $54,000 per year.
General and administrative salaries are $144,000 per year. Maintenance expense equals $2,100 per month and is paid in cash.
Equipment reported in the December 31, 2017, balance sheet was purchased in January 2017. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $38,400; February, $91,200; and March, $26,400. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full month’s depreciation is taken for the month in which equipment is purchased.
The company plans to buy land at the end of March at a cost of $155,000, which will be paid with cash on the last day of the month.
The company has a working arrangement with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of $9,000 at the end of each month.
The income tax rate for the company is 43%. Income taxes on the first quarter’s income will not be paid until April 15.
Required:
Prepare a master budget for each of the first three months of 2018; include the following component budgets:
1. Monthly sales budgets.
2. Monthly merchandise purchases budgets.
3. Monthly selling expense budgets.
4. Monthly general and administrative expense budgets.
5. Monthly capital expenditures budgets.
6. Monthly cash budgets.
7. Budgeted income statement for the entire first quarter (not for each month).
8. Budgeted balance sheet as of March 31, 2018.
Estimated Balance Sheet
December 31, 2017 Assets Cash $ 36,500 Accounts receivable 520,000 Inventory 157,500 Total current assets $ 714,000 Equipment 564,000 Less: accumulated depreciation 70,500 Equipment, net 493,500 Total assets $ 1,207,500 Liabilities and Equity Accounts payable $ 355,000 Bank loan payable 15,000 Taxes payable (due 3/15/2018) 92,000 Total liabilities $ 462,000 Common stock 472,500 Retained earnings 273,000 Total stockholders’ equity 745,500 Total liabilities and equity $ 1,207,500
Explanation / Answer
Answer a Sales Budget Jan Feb March Total Sales in Units 7,500 8,750 10,500 26,750 Sp Per Unit 54 54 54 54 Total Sales in $ 405,000 472,500 567,000 1,444,500 Cash Sales - 20% of Sales 81,000 94,500 113,400 288,900 Credit Sales - 80% of Sales 324,000 378,000 453,600 1,155,600 Schedule of Expected Cash Collections from Sales Jan Feb March Total Cash Sales - 20% of Sales 81,000 94,500 113,400 288,900 Collection from Accounts Receivables Accounts Receivable - Dec 31, 2017 120,000 400,000 520,000 Jan Sales - 184,680 139,320 324,000 Feb Sales - - 215,460 215,460 Total cash Collections 120,000 584,680 354,780 1,059,460 Answer b. Merchandise Purchase Budget Jan Feb March Total Sales In units 7,500 8,750 10,500 26,750 Add: Closing Inventory in units 1,750 2,100 2,100 5,950 Total Needs 9,250 10,850 12,600 32,700 Less: opening Inventory in uints (5,250) (1,750) (2,100) (9,100) Required Purchases in Units 4,000 9,100 10,500 23,600 Price per paid of Earings 30.00 30.00 30.00 30.00 Total Purchases in $ 120,000 273,000 315,000 708,000 Schedule of Cash payments to Suppliers Jan Feb March Total Cash Payment Accounts Payable - Dec 31, 2017 75,000 280,000 - 355,000 Jan Purchases - 24,000 96,000 120,000 Feb Purchases - - 54,600 54,600 Total Cash Payment to Suppliers 75,000 304,000 150,600 529,600 Answer c. Selling Expenses Budget Jan Feb March Total Sales Comm. - 20% of Sales 81,000 94,500 113,400 288,900 Sales Salary Expense 4,500 4,500 4,500 13,500 Total 85,500 99,000 117,900 302,400 Schedule of Cash Payment of Selling Expenses Budget Jan Feb March Total Sales Comm. - 20% of Sales 81,000 94,500 113,400 288,900 Sales Salary Expense 4,500 4,500 4,500 13,500 Total 85,500 99,000 117,900 302,400 Answer d. General & Administrative Expenses Budget Jan Feb March Total Salary Expenses - General & Admn. 12,000 12,000 12,000 36,000 Maint. Expenses 2,100 2,100 2,100 6,300 Depreciation Expenses - Equipment 6,275 7,225 7,500 21,000 Total 14,100 14,100 14,100 42,300 Depreciation Expenses Jan Feb March Total Old Equipment 5,875 5,875 5,875 17,625 Equipment Purchased - Jan 400 400 400 1,200 Equipment Purchased - Feb - 950 950 1,900 Equipment Purchased - Mar - - 275 275 Total Depreciation 6,275 7,225 7,500 21,000 Schedule of Cash payments of General & Admn. Budget April May June Total Salary Expenses - General & Admn. 12,000 12,000 12,000 36,000 Maint. Expenses 2,100 2,100 2,100 6,300 Total 14,100 14,100 14,100 42,300 Answer e. Capital Expenditure Budget Jan Feb March Total Equipment Purchased 38,400 91,200 26,400 156,000 Land Purchased - - 155,000 155,000 Total 38,400 91,200 181,400 311,000 Answer f. Cash budget Jan Feb March Total Opening cash Balance 36,500 9,350 9,920 36,500 Add: receipts Collection from Customers 120,000 584,680 354,780 1,059,460 Total Cash available 156,500 594,030 364,700 1,095,960 Less: Disbursements Cash Disbursement - Accounts Payable 75,000 304,000 150,600 529,600 Selling Expenses 85,500 99,000 117,900 302,400 General & Administrative Expenses 14,100 14,100 14,100 42,300 Capital Expenditure 38,400 91,200 181,400 311,000 Taxes Payable - - 92,000 92,000 Total Disbursement 213,000 508,300 556,000 1,277,300 Cash Balance Closing (56,500) 85,730 (191,300) (181,340) Add: Finance from Bank 66,000 66,000 Less: Payment to Bank - (75,000) 201,000 126,000 Less: Payment of interet - Bank loan (150) (810) (60) (870) Net Cash Balance Closing 9,350 9,920 9,640 9,790