Question

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$16 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual) February (actual) March (actual) April (budget) May (budget) 21,200 27,200 41,200 66,200 101,200 June (budget) July (budget) August (budget) September (budget) 51,200 31,200 29, 200 26,200

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $4.60 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 260,000 $ 24,000 $ 118,000 $ 10,000 $ 3,600 $ 20,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $19,000 in new equipment during May and $46,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $19,500 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

The company maintains a minimum cash balance of $56,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $56,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

1. a. A sales budget, by month and in total.

    b. A schedule of expected cash collections, by month and in total.

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

    d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $56,000.

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.

Req 1A Req 1B Req 1C Req 1D Req 2 Req 3 Req 4 Prepare a master budget for the three-month period ending June 30 that includes a merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost to 2 decimal places.) Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales Total needs Required purchases Unit cost Required dollar purchases

Req 1A Req 1B Req 1C Req 1D Req 2 Req 3 Req 4 Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash disbursements for merchandise purchases, by month and in total. Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable April purchases May purchases June purchases Total cash payments

Req 1A Req 1B Req 1C Req 1D Req 2 Req3 Req 4 Prepare a master budget for the three-month period ending June 30 that includes a cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $56,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Merchandise purchases Advertising Rent Salaries Commissions Utilities Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance

Req 1A Req 1B Req 1C Req 10 Req 1D Req 2 Reqz Req3 Req3 | Rega Req 4 Prepare a master budget for the three-month period ending June 30 that includes a budgeted balance sheet as of June 30. Earrings Unlimited Budgeted Balance Sheet June 30 Assets Total assets Liabilities and Stockholders' Equity Total liabilities and stockholders' equity Req3 Req 4 )

Answer 1

Solution 1a:

Sales Budget - Earrings Unlimited
Particulars	April	May	June	Total
Budgeted Sales units	66200	101200	51200	218600
Selling price per unit	$16.00	$16.00	$16.00	$16.00
Total Sales	$1,059,200.00	$1,619,200.00	$819,200.00	$3,497,600.00

Solution 1b:

Schedule of expected cash collection - Earrings Unlimited
Particulars	April	May	June	Total
Cash received for Feburary Sale	$43,520.00			$43,520.00
Cash received for March Sale	$461,440.00	$65,920.00		$527,360.00
Cash received for April Sale	$211,840.00	$741,440.00	$105,920.00	$1,059,200.00
Cash received for May Sale		$323,840.00	$1,133,440.00	$1,457,280.00
Cash received for June Sale			$163,840.00	$163,840.00
Budgeted Cash Collection	$716,800.00	$1,131,200.00	$1,403,200.00	$3,251,200.00

Solution 1c:

Merchandise Purchase Budget - Earrings Unlimited
Particulars	April	May	June	Total
Sales units	66200	101200	51200	218600
Add: Desired ending inventory (40% of next month sales)	40480	20480	12480	12480
Total needs	106680	121680	63680	231080
Less: Opening Inventory	26480	40480	20480	26480
Estimated purchase for earrings (In pairs)	80200	81200	43200	204600
Cost per pair	$4.60	$4.60	$4.60	$4.60
Budgeted purchases (in dollars)	$368,920.00	$373,520.00	$198,720.00	$941,160.00

Solution 1d:

Budgeted Cash disbursement for merchandise purchases - Earrings Unlimited
Particulars	April	May	June	Total
Accounts Payable	$106,000.00			$106,000.00
April Purchases	$184,460.00	$184,460.00		$368,920.00
May Purchases		$186,760.00	$186,760.00	$373,520.00
June Purchases			$99,360.00	$99,360.00
Total cash payments	$290,460.00	$371,220.00	$286,120.00	$947,800.00

Note: I have answered first 4 parts of the question as HOMEWORKLIB RULES policy, kindly post separate question for answer of remaining questions.