Question

Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as of April 30 is given below:

Minden Company Balance Sheet April 30
Assets
Cash	$	9,600
Accounts receivable		54,750
Inventory		53,750
Buildings and equipment, net of depreciation		214,000
Total assets	$	332,100
Liabilities and Stockholders’ Equity
Accounts payable	$	70,500
Note payable		18,100
Common stock		180,000
Retained earnings		63,500
Total liabilities and stockholders’ equity	$	332,100

The company is in the process of preparing a budget for May and has assembled the following data:

1. Sales are budgeted at $257,000 for May. Of these sales, $77,100 will be for cash; the remainder will be credit sales. One-half of a month’s credit sales are collected in the month the sales are made, and the remainder is collected in the following month. All of the April 30 accounts receivable will be collected in May.

2. Purchases of inventory are expected to total $121,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder are paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May.

3. The May 31 inventory balance is budgeted at $31,000.

4. Selling and administrative expenses for May are budgeted at $83,700, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,800 for the month.

5. The note payable on the April 30 balance sheet will be paid during May, with $340 in interest. (All of the interest relates to May.)

6. New refrigerating equipment costing $13,100 will be purchased for cash during May.

7. During May, the company will borrow $22,000 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

Required:

1. Calculate the expected cash collections from customers for May.

2. Calculate the expected cash disbursements for merchandise purchases for May.

3. Prepare a cash budget for May.

4. Prepare a budgeted income statement for May.

5. Prepare a budgeted balance sheet as of May 31.

Answer 1

Answer -

1. Answer -

Expected cash collections from customers for May = $221800

Calculation:

As per given information,

Budgeted sales in May = $257000

Budgeted cash sale in May = $77100

Credit sale (remainder) = Budgeted sales - Budgeted cash sale

= $257000 - $77100

= $179900

But,

One-half of a month’s credit sales are collected in the month the sales are made.

So,

Collection of credit sale in month of May:

= $179900 / 2

= $89950

And all April 30 accounts receivable will be collected in May.

Therefore,

Expected cash collections from customers for May:

= Budgeted cash sale in May + Collection of credit sale in May + Accounts receivable (April 30)

= $77100 + $89950 + $54750

= $221800

2. Answer -

Expected cash disbursements for inventory purchases for May = $118900

As per given information,

Expected purchases of inventory = $121000

But, 40% of all purchases are paid for in the month of purchase.

Purchase payment made in May:

= $121000 * 40%

= $48400

And all April 30 accounts payable to suppliers will be paid during May.

Therefore,

Expected cash disbursements for inventory purchases for May:

= Purchase payment made in May + Account payable (April 30)

= $48400 + $70500

= $118900

3. Answer -

Minden Company
Cash Budget
For the Month of May
Beginning cash balance	$9600
Add: Collection from customers	$221800
Total cash available	$231400
Less: Cash disbursements:
Payment for inventory	$118900
Selling and administrative expenses	$83700
Purchases of equipment	$13100
Total cash disbursements	$215700
Excess of cash available over disbursement	$15700
Financing:
Borrowing (New note)	$22000
Repayment (Previous note)	($18100)
Interest	($340)
Total financing	$3560
Ending cash balance	$19260

Calculation:

1. Total cash available = Beginning cash balance + Collection from customers

= $9600 + $221800

= $231400

2. Total cash disbursement = Payment for inventory + Selling and administrative expenses (excluding depreciation expense) + Purchase of equipment

= $118900 + $83700 + $13100

= $215700

3. Excess of cash available over cash disbursement = Total cash available - Total cash disbursement

= $231400 - $215700

= $15700

4. Total financing = Borrowing - Repayment - Interest paid

= $22000 - $18100 - $340

= $3560

5. Ending cash balance = Excess of cash available over cash disbursement + Total financing

= $15700 + $3560

= $19260

4. Answer -

Minden Company
Budgeted Income Statement
For the Month of May
Sales		$257000
Cost of goods sold:
Beginning inventory	$53750
Add: Purchases of inventory	$121000
Goods available for sale	$174750
Less: Ending inventory	$31000
Cost of goods sold		$143750
Gross margin		$113250
Selling and administrative expenses		$86500
Net operating income		$26750
Interest expense		$340
Net income		$26410

Calculation:

1. Cost of goods sold = Beginning inventory + Purchases of inventory - Ending inventory

= $53750 + $121000 - $31000

= $143750

2. Gross margin = Sale - Cost of goods sold

= $257000 - $143750

= $113250

3. Net operating income = Gross margin - Selling and administrative expenses (including depreciation expense)

= $113250 - ($83700 + $2800)

= $26750

4. Net income = Net operating income - Interest expense

= $26750 - $340

= $26410

5. Answer -

Minden Company
Budgeted Balance Sheet
As of May 31
Assets:
Cash	$19260
Accounts receivable	$89950
Inventory	$31000
Building and equipment, net of depreciation	$224300
Total assets	$364510
Liabilities and stockholders equity:
Accounts payable	$72600
Note payable	$22000
Common stock	$180000
Retained earnings	$89910
Total liabilities and shareholders equity	$364510

Calculation:

1. Cash = $19260

For ending cash balance referred cash budget

2. Account receivable:

One-half of a month’s credit sales are collected in the month the sales are made and remainder is collected in the following month.

So,

Collection of credit sale in month of May:

= $179900 / 2 = $89950

Remainder (account receivable) = Total credit sale - Collection of credit sale in May

= $179900 - $89950

= $89950

3. Buildings and equipment, net of depreciation:

= Beginning balance of Buildings and equipment, net of depreciation + Purchase of equipment - Depreciation expense

= $214000 + $13100 - $2800

= $224300

4. Accounts payable:

40% of all purchases are paid for in the month of purchase and remainder is paid in the following month.

So,

Purchase payment made in May:

= $121000 * 40%

= $48400

Therefore,

Remainder (account payable) = Total purchases - Purchase payment made in May

= $121000 - $48400

= $72600

5. Retained earnings:

= Beginning balance of retained earnings + Net income

= $63500 + $26410

= $89910