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 Accounts receivable Inventory Plant and equipment, net of depreciation $ 89,000 135,000 61,000 290,000 Total assets $ 575,000 $ Liabilities and Shareholders' Equity Accounts payable Common shares Retained earnings 70,000 390,000 115,000 Total liabilities and shareholders' equity $ 575,000 Colerain's managers have made the following additional assumptions and estimates: a. Estimated sales for July, August, September, and October will be $245,000, $265,000, $255,000, and $275,000, respectively. b. 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. c. 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. d. 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. e. 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.

Answer 1

1. Schedule of Expected Cash Collection

	July	August	September	Quarter
From Accounts Receivable	$135,000			$135,000
Sales on Account;
July	$61,250	$183,750		$245,000
August		$66,250	$198,750	$265,000
September			$63,750	$63,750
Total Cash Collection	$196,250	$250,000	$262,500	$708,750

2.a) Merchandise Purchase Budget

	July	August	September	Quarter
Budgeted Cost of Goods Sold	$147,000	$159,000	$153,000	$459,000
Add: Ending Inventory	$55,650	$53,550	$57,750	$57,750
Total Needs	$202,650	$212,550	$210,750	$516,750
Deduct : Beginning Inventory	$61,000	$55,650	$53,550	$61,000
Required Purchase	$141,650	$156,900	$157,200	$455,750

2.b ) Schedule of Cash Disbursements for Purchase

	July	August	September	Total
From Accounts Payable	$70,000			$70,000
July Purchase	$70,825	$70825		$141,650
August Purchase		$78,450	$78,450	$156,900
September Purchase			$78,600	$78,600
Total Cash Disbursement	$140,825	$149,275	$157,050	$447,150

3. Colerain Corporation

Income Statement

For the Quarter Ended September 30

Sales ($245,000+$265,000+$255,000)	$765,000
Cost of Goods Sold	$459,000
Gross Margin	$306,000
Selling and Administrative Expenses	$222,000
Net Operating Income	$84,000
Interest Expense	0
Net Income	$84,000

4. Colerain Corporation

Balance Sheet

September30

Assets
Cash ($89,000+$708,750-$447,150-($65,000×3)	$155,600
Accounts Receivable	$191,250
Plant and Equipment Net ($290,000-$27,000)	$263,000
Inventory	$57,750
Total Assets	$667,600
Liabilities and Stockholders Equity
Accounts Payable	$78,600
Capital Stock	$390,000
Retained Earnings ($84,000+$115,000)	$199,000
Total Liabilities and Stockholders Equity	$667,600