Question

Assets Cash $ 35,500 Accounts receivable 520,000 Inventory 105,000 Total current assets $ 660,500 Equipment 636,000 Less: accumulated depreciation 79,500 Equipment, net 556,500 Total assets $ 1,217,000 Liabilities and Equity Accounts payable $ 345,000 Bank loan payable 15,000 Taxes payable (due 3/15/2018) 89,000 Total liabilities $ 449,000 Common stock 475,000 Retained earnings 293,000 Total stockholders’ equity 768,000 Total liabilities and equity

1. The company’s single product is purchased for $20 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, 7,000 units; February, 9,250 units; March, 11,250 units; and April, 10,500 units.
2. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 63% is collected in the first month after the month of sale and 37% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $130,000 is collected in January and the remaining $390,000 is collected in February.
3. 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, $90,000 is paid in January and the remaining $255,000 is paid in February.
4. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $60,000 per year.
5. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,000 per month and is paid in cash.
6. 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, $33,600; February, $91,200; and March, $19,200. 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.
7. The company plans to buy land at the end of March at a cost of $150,000, which will be paid with cash on the last day of the month.
8. 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 $26,650 at the end of each month.
9. The income tax rate for the company is 37%. 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

Answer 1

1. Monthly sales budget
	Jan	Feb	Mar	Apr
Sale (Units)	7000	9250	11250	10500
Selling price per unit	54	54	54	54
Total sale amount	378000	499500	607500	567000
Less: Sale commission	75600	99900	121500	113400
Cash sale	75600	99900	121500	113400
Credit sale	226800	299700	364500	340200
Collections
Cash sales	75600	99900	121500	113400
Credit sale	130000	532884	188811	229635
			83916	110889
2. Purchase Budget
Purchase Qty
Sales	7000	9250	11250	10500
Add: Closing	1850	2250	2100
Less: Opening	5250	1850	2250
Purchase	3600	9650	11100
Purchase Amount	72000	193000	222000
Payment for purchases		14400	57600
	90000	255000	38600	154400
Total payment	90000	269400	96200
3. Selling expenses budget
Sale Commission	75600	99900	121500
Sale Salary	5000	5000	5000
Total	80600	104900	126500
4. General and Admin Expenses Budget
General	12000	12000	12000
Cash Expenses	2000	2000	2000
Total	14000	14000	14000
5. Capital Expenditure Budget
Cash Expenses (Purchase of Equipment)	33600	91200	19200
Depreciation amount on new equipment	350	350	350
		950	950
			200
	350	1300	1500
6. Monthly cash budgets
Sale	205600	632784	394227
Less: Purchases	90000	269400	96200
Less: Selling Expenses	5000	5000	5000
Less: Geberal Expenses	14000	14000	14000
Less: Capital Expenses	33600	91200	19200
Less: Taxes Paid'			89000
Net Cash Balance	63000	253184	170827
Opening cash balance	35500
Add: Retained Earnings	293000
Add: Sale	1232611
Less : Expenses	745600
Closing cash balance	815511
7. Budgeted Income Statement
Net Sales	1485000
Less: Sale Commission	297000
Less: COS	487000
Less: Selling Expenses	15000
Less: General Expenses	42000
Less: Depreciation	3150
Less: Depreciation on old equipment	19875
Net Profit/ (Loss)	620975
8. Budgeted balance Sheet
Assets
Cash	800511
Accounts receivable	475389
Inventory	42000
Total Current assets	1317900
Equipment	780000
Less: Accumulated depreciation	102525
Total	1995375
Liabilities and Equity payable	376400
Bank loan payable	0
Taxes payable
Total Liability	376400
Capital Stock	475000
Retaained Earnings	620975
Total	1995375