Question

Near the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017.

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017
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				$	1,217,000

To prepare a master budget for January, February, and March of 2018, management gathers the following information.

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 capital expenditures budgets.
2. Monthly cash budgets.
3. Budgeted income statement for the entire first quarter (not for each month).
4. Budgeted balance sheet as of March 31, 2018

Answer 1

1.

Capital Expenditure Budgets
	January	February	March	Total
Purchase of Equipment	$ 33,600	$ 91,200	$ 19,200	$ 144,000
Purchase of Land	-	-	150,000	150,000
Budgeted Total Capital Expenditures	$ 33,600	$ 91,200	$ 169,200	$ 294,000

2.

Cash Budget For the quarter ended March 31, 2018
	January	February	March	Quarter
Beginning cash balance	$ 35,500	$ 26,650	240,630	$ 35,500
Cash Receipts	224,500	693,480	492,783.75	1,410,763.75
Total cash available	260,000	720,130	733,413.75	1,446,263.75
Less: Cash disbursements for
Merchandise purchases	90,000	269,400	96,200	455,600
Selling Expenses	80,600	104,900	126,500	312,000
General and Administrative Expenses	14,000	14,000	14,000	42,000
Capital Expenditures	$ 33,600	$ 91,200	$ 169,200	$ 294,000
Taxes	-	-	89,000	89,000
Interest	150	0	0	150
Total Cash Disbursements	218,350	479,500	494,900	1,192,750
Cash Surplus ( Deficit )	41,650	240,630	238,513.75	253,513.75
Financing
Borrowing	0	0	0	0
Repayment	(15,000)	0	0	(15,000)
Total Financing	0	0	0
Ending cash balance	26,650	240,630	238,513.75	238,513.75

3.

Budgeted Income Statement For the quarter ended March 31, 2018
Sales		$ 1,485,000
Cost of Goods Sold		550,000
Gross Profit		$ 935,000
Operating Expenses
Selling Expenses	$ 312,000
General and Administrative Expenses	42,000
Depreciation Expense ( 19,875 + 1,050 + 1,900 + 200)	23,025
Interest Expense	150
Total Operating Expenses		377,175
Income before Taxes		557,825
Income Tax Expense		206,395
Net Income		$ 351,430

4.

Budgeted Balance Sheet March 31, 2018
Assets
Cash	$ 238,513.75
Accounts Receivable	594,236.25
Inventory	42,000
Total Current Assets		$ 874,750
Equipment	780,000
Less: Accumulated Depreciation	102,525
Equipment, net		677,475
Land		150,000
Total Assets		$ 1,702,225
Liabilities and Equity
Accounts Payable	376,400
Taxes Payable	206,395
Total Liabilities		582,795
Common Stock	475,000
Retained Earnings	644,430
Total Stockholders Equity		1,119,430
Total Liabilities and Equity		$ 1,702,225

Workings:

Schedule of Cash Receipts from Sales
	January	February	March	Quarter
Cash Sales	$ 94,500	$ 124,875	$ 151,875	$ 371,250
Collection of Accounts Receivable	130,000	390,000	0	520,000
Collection of January credit sales		178,605	104,895	283,500
Collection of February credit sales			236,013.75	236,013.75
Cash Receipts	$ 224,500	$ 693,480	$ 492,783.75	$ 1,410,763.75

Cash Disbursements for Merchandise Purchases
	January	February	March	Quarter
Accounts Payable	$ 90,000	$ 255,000	-	$ 345,000
January Purchases	-	14,400	57,600	72,000
February Purchases	-	-	38,600	38,600
Total Cash Disbursements	90,000	269,400	96,200	455,600