Question

Helping Hand is a small, rapidly growing wholesaler of consumer electronic products. The company's main product lines are small kitchen appliances and power tools. The marketing manager has recently completed a sales forecast. She believes the company's sales will increase by 2 percent each month over the previous month's sales from December 2019 through March 2020. Then sales are expected to remain constant for several months. Helping Hand's projected balance sheet as of December 31, 2019 is as follows: Cash 140,000 Accounts receivable 202,851 Marketable securities 55,000 Inventory 35,894 Buildings and equipment (net of accumulated depreciation) 610,000 Total assets $ 1,043,745 $ 124,488 7,038 5,000 Accounts payable Sales commissions payable Bond interest payable Property taxes payable Bonds payable (3%, due in 2023) Common stock Retained earnings Total liabilities and stockholders' equity 500,000 250,000 157,219 1,043,745 $

1) Projected sales for November 2019 are $230,000. Credit sales are typically 85% of total sales. Helping Hand’s credit experience indicates that 12% of credit sales are collected during the month of sale, 74% in the month following the sale, and 14% in the second month following the sale. Experience shows the remaining credit sales are uncollectible.

2) Helping Hand’s cost of goods sold generally runs at 60% of sales. Inventory is purchased on account and 12% of each month’s purchases are paid during the month of purchase. The remainder is paid during the following month. In order to have adequate stocks of inventory on hand, the company attempts to have inventory on hand at the end of each month equal to 25% of the next month’s projected cost of goods sold.

3) The controller has estimated that Helping Hand’s other monthly expenses will be as follows:

Sales salaries $30,000
Advertising and promotion $6,000

Administrative salaries $11,000

Depreciation $8,000
Interest on bonds $1,250

Property taxes $4,000

In addition, sales commissions run at the rate of 3.0 percent of sales. Sales commissions are paid in the month following the month of sale.

4) The company president has indicated that the company should invest $200,000 in an automated inventory-handling system to control the movement of inventory in the company’s warehouse just after the new year begins. The president would like to purchase the equipment primarily from the company’s cash and marketable securities. However, the president believes the company should have a minimum cash balance of $20,000 at the end of each month. If necessary, the remainder of the equipment purchase may be financed using short-term credit from a local bank. The minimum lending period for such a loan is three months (this means the earliest the loan can be paid off is March 31st). The current short-term interest rates are 6 percent per year and are expected to remain at this rate through the time the equipment is purchased. If a loan is necessary, the entire amount required for the quarter must be borrowed on January 1st and must be in a $1,000 increment. The loan is a short term loan and the president has decided it should be paid off at the end of the first quarter if possible. If the entire amount cannot be repaid at March 31st, any partial payment will be paid at the end of the first quarter and in a $1,000 increment.

5) Helping Hand’s board of directors has indicated an intention to declare and pay dividends of $100,000 on the last day of each quarter.

6) The interest on any short-term borrowing will be paid when the loan is repaid. Interest on Helping Hand’s bonds is paid semiannually on February 28 and August 31 for the preceding six- month period.

7) Property taxes are paid quarterly on March 31, June 30, September 30, and December 31 for the preceding three-month period.

Answer 1

Answer with working notes is given below

Sales Budget 2019 November December $230,000 $234,600 2020 January | February | March | Quarter $239,292 $244,078 $248,959 $732,329 Budgeted Sales (value) Total Sales Cash Sales - 15% Sales on Account 2019 November December $230,000 $234,600 $34,500 $35,190 $195,500 $199,410 January $239,292 $35,894 $203,398 2020 February | March | Quarter $244,078 $248,959 $732,329 $36,612 $37,344 $109,849 $207,466 $211,615 $622,480 Cash Receipts January $35,894 2020 February $36,612 March $37,344 Quarter $109,849 Cash Sales Cash collections from customers November Sales December Sales January Sales February Sales March Sales Total Cash receipts $27,370 $147,563 $24,408 $27,917 $150,515 $24,896 $28,476 $153,525 $25,394 $244,738 $27,370 $175,481 $203,398 $178,421 $25,394 $719,913 $235,235 $239,940 COGS 2019 December $234,600 $140,760 2020 February $244,078 $146,447 January $239,292 $143,575 Sales COGS -60% March $248,959 $149,376 April $248,959 $149,376 Inventory Purchase Budget Budgeted Cost of Goods sold Add: Desired Ending Inventory Total Needs Less: Expected Beginning Inventory Purchase Budget Closing stock of month will be opening stock of next month January $143,575 $36,612 $180,187 $35,894 $144,293 2020 February $146,447 $37,344 $183,791 $36,612 $147,179 March $149,376 $37,344 $186,720 $37,344 $149,376 Quarter $439,398 $37,344 $476,741 $35,894 $440,848 Expected Cash disbursements for Materials Purchases and expenses 2020 February January March Quarter $17,315 $124,488 $141,803 $17,661 $126,978 $144,639 $17,925 $129,517 $147,443 $52,902 $380,983 $433,885 Inventory purchase Cash payments for purchases during the current month Cash payments for purchases during the preceding month Total cash payment for inventory purchase Other expenses Sales Salaries Advertising and promotion Administrative salaries Interest on bonds Property taxes Sales Commission - 3% of Sales of Preceding month $30,000 $6,000 $11,000 $30,000 $6,000 $11,000 $7,500 $30,000 $6,000 $11,000 $90,000 $18,000 $33,000 $7,500 $12,000 $21,539 $12,000 $7,322 $7,038 $7,179 Total purchase and overhead payments $195,841 $206,318 $213,765 $615,924 Cash Budget January February March Quarter $239,940 $206,318 $33,622 $244,738 $213,765 $30,974 $235,235 $195,841 $39,394 $55,000 $25,000 -$200,000 Cash Receipts Less: cash disbursements Change in cash balance during period due to operations Sale of marketable securities Proceeds from bank loan Purchase of Equipment Repayment of bank loan Interest on bank loan (6% for 3 months) Payment of Dividend Total cash disbursement Cash Balance - Beginning Cash Balance Closing $719,913 $615,924 $103,989 $55,000 $25,000 -$200,000 $3,000 -$375 -$100,000 -$119,386 $140,000 $20,614 $80,606 $140,000 $59,394 -$3,000 -$375 -$100,000 $72,401 $93,015 $20,614 $33,622 $59,394 $93,015 Note: Interest on loan is paid for $25,000 for 3 months at 6% Calculation of required short term borrowing Projected cash balance of December 31, 2019 Less: Minimum balance cash available for equipment purchase Projected proceeds from sale of marketable securities cash available Less: Cost of investment in equipment Required short term borrowing $140,000 $20,000 $120,000 $55,000 $175,000 $200,000 $25,000 $732,329 $35,894 $440,848 $476,741 $37,344 $439,398 $292,932 Helping Hand Budgeted Income Statement for First Quarter 2019 Sales Beginning inventory Purchases Goods available Ending inventory Cost of Goods sold Gross Margin Operating expenses Selling and administration expenses Sales Salaries Advertising and promotion Administrative salaries Sales Commission - 3% of Sales Other expense Interest on Bonds Interest on short term loan Property taxes Depreciation Net Operating Income $90,000 $18,000 $33,000 $21,970 $162,970 $3,750 $375 $12,000 $24,000 $40,125 $89,837 3% Sales Commission January Sales February Sales March Sales Total Sales $239,292 244,078 $248,959 $732,329 $7,179 $7,322 $7,469 $21,970 Helping Hand Budgeted Balance Sheet March 31, 2020 Cash Accounts receivable Inventory Buildings and equipment net of depreciation Add: Purchases $20,614 $215,267 $37,344 $610,000 $200,000 $810,000 $24,000 Less: Depreciation during the year Total Assets $786,000 $1,059,225 Accounts payable Sales commission payable Bonds interest payable Short term bank borrowing Bonds payable Common stock Retained earnings Total Liabilities and Stockholders' Equity $131,451 $7,469 $1,250 $22,000 $500,000 $250,000 $147,056 $1,059,225 Helping Hands Budgeted Statement of Retained Earnings Retained earnings 12/31/2019 Add: Net profit Less: Dividend paid Retained earnings 12/31/2020 $157,219 $89,837 -$100,000 $147,056 Accounts receivable closing balance Opening Balance Add : Credit Sales Less: Collection Closing Balance $202,851 $622,480 -$610,064 $215,267 Accounts payable closing balance Opening Balance Add: Purchases Less: Payment Closing Balance $124,488 $440,848 -$433,885 $131,451