Question

Colerain Corporation is a merchandising company that is preparing a budget for the third quarter of the calendar year. The company’s balance sheet as of June 30 is shown below:

COLERAIN CORPORATION Balance Sheet June 30
Assets
Cash	$   89,000
Accounts receivable	135,000
Inventory	61,000
Plant and equipment, net of depreciation	290,000
Total assets	$ 575,000
Liabilities and Shareholders’ Equity
Accounts payable	$   70,000
Common shares	390,000
Retained earnings	115,000
Total liabilities and shareholders’ equity	$ 575,000

Colerain’s managers have made the following additional assumptions and estimates:

1. Estimated sales for July, August, September, and October will be $245,000, $265,000, $255,000, and $275,000, respectively.
2. All sales are on credit and all credit sales are collected. Each month’s credit sales are collected 25% in the month of sale and 75% in the month following the sale. All of the accounts receivable at June 30 will be collected in July.
3. Each month’s ending inventory must equal 35% of the cost of next month’s sales. The cost of goods sold is 60% of sales. The company pays for 50% of its merchandise purchases in the month of the purchase and the remaining 50% in the month following the purchase. All of the accounts payable at June 30 will be paid in July.
4. Monthly selling and administrative expenses are always $74,000. Each month, $9,000 of this total amount is depreciation expense and the remaining $65,000 relates to expenses that are paid in the month they are incurred.
5. The company does not plan to borrow money or pay or declare dividends during the quarter ended September 30. The company does not plan to issue any common shares or repurchase its own shares during the quarter ended September 30.

Required:
1. Prepare a schedule of expected cash collections for July, August, and September. Also compute total cash collections for the quarter ended September 30.

2a. Prepare a merchandise purchases budget for July, August, and September. Also compute total merchandise purchases for the quarter ended September 30.

2b. Prepare a schedule of expected cash disbursements for merchandise purchases for July, August, and September. Also compute total cash disbursements for merchandise purchases for the quarter ended September 30th.

  

3. Prepare an income statement for the quarter ended September 30. (Do not leave any empty spaces; input a 0 wherever it is required.)

4. Prepare a balance sheet as of September 30.

Answer 1

Required Budgets are as prepared below:

1
Colerian Corporation
Sales Budget
For the quarter ended September 30
	Month
Particulars	July	August	September	Total	October
Budgeted sales	245,000	265,000	255,000	765,000	275,000
Colerian Corporation
Schedule of expected Cash collections
For the quarter ended September 30
	Month
Particulars	July	August	September	Total
Account Receivable	135,000			135,000
Credit Sales				0
Collected in same month	61,250	66,250	63,750	191,250
Collected in following month		183,750	198,750	382,500
Total collections	196,250	250,000	262,500	708,750
Account receivable for September Sale (255,000*.75)			191,250
2a
Colerian Corporation
Merchandise Purchase Budget
For the quarter ended September 30
	Month
Particulars	July	August	September	Total	October
Sales	147,000	159,000	153,000	459,000	165,000
Add: Desired Ending merchandise inventory (35% of next month COS)	55,650	53,550	57,750	57,750
Total needs	202,650	212,550	210,750	516,750
Less: beginning merchandise inventory	61,000	55,650	53,550	61,000
Required purchases	$141,650	$156,900	$157,200	$455,750
2b
Colerian Corporation
Schedule of expected Cash payments
For the quarter ended September 30
	Month
Particulars	July	August	September	Total
Account Payable	$70,000			$70,000
Paid in same month	$70,825	$78,450	$78,600	$227,875
Paid in following month		$70,825	$78,450	$149,275
				$0
Total disbursements	$140,825	$149,275	$157,050	$447,150
Colerian Corporation
Selling and administrative expenses
For the quarter ended September 30
	Month
Particulars	July	August	September	Total
Selling and administrative expenses	74,000	74,000	74,000	222,000
Less: Depreciation	-9,000	-9,000	-9,000	-27,000
				0
Total disbursements	65,000	65,000	65,000	195,000
Colerian Corporation
Cash Budget
For the quarter ended September 30
	Month
Particulars	July	August	September	Total
Beginning Cash balance	89,000	79,425	115,150	89,000
Add: Collection from customers	$196,250	$250,000	$262,500	$708,750
cash available for use	$285,250	$329,425	$377,650	$797,750
Less: cash Disbursements
For inventory	$140,825	$149,275	$157,050	447,150
For sellinga nd adminsitrative expenses	65,000	65,000	65,000	195,000
Total cash disbusrement	205,825	214,275	222,050	642,150
Excess (deficiency) of cash	79,425	115,150	155,600	155,600
Budgeted ending cash balance	79,425	115,150	155,600	155,600
3
Colerian Corporation
Budgeted Income Statement
For the quarter ended September 30
Particulars	Amount ($)	Amount ($)
Sales		765,000
Less: Cost of goods sold (60% of sales)		459,000
Contribution Margin		306,000
Less: expenses:
Selling and administrative expenses	195,000
Depreciation	27,000	222,000
Net Income		84,000
4
Colerian Corporation
Budgeted balance Sheet
For the quarter ended September 30
Assets
Cash	155,600
Accounts Receivable	191,250
Inventory	57,750
Plant and Equipment, Net of depreciation (290,000-27,000)	263,000
Total assets	667,600
Liabilities and Stockholders' Equity
Accounts Payable purchases	78,600
Common Shares	390,000
Retained Earnings (115,000+84,000)	199,000
Total liabilities and stockholders' equity	667,600		0