Question

PROBLEM 8–27 Completing a Master Budget [LO8–2, LO8–4, LO8–7, LO8–8, LO8–9, LO8–10]
The following data relate to the operations of Shilow Company, a wholesale distributor of consumer
goods:
Current assets as of March 31:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,000
Accounts receivable . . . . . . . . . . . . . . $20,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . $36,000
Building and equipment, net . . . . . . . . . . $120,000
Accounts payable . . . . . . . . . . . . . . . . . . $21,750
Common stock . . . . . . . . . . . . . . . . . . . . $150,000
Retained earnings . . . . . . . . . . . . . . . . . . $12,250
March (actual) . . . . . . . . . . . . . . $50,000
April . . . . . . . . . . . . . . . . . . . . . . $60,000
May . . . . . . . . . . . . . . . . . . . . . . $72,000
June . . . . . . . . . . . . . . . . . . . . . . $90,000
July . . . . . . . . . . . . . . . . . . . . . . $48,000
a. The gross margin is 25% of sales.
b. Actual and budgeted sales data:
c. Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following
sale. The accounts receivable at March 31 are a result of March credit sales.
d. Each month’s ending inventory should equal 80% of the following month’s budgeted cost of
goods sold.
e. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half
is paid for in the following month. The accounts payable at March 31 are the result of March
purchases of inventory.
f. Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other
expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly.
Depreciation is $900 per month (includes depreciation on new assets).
g. Equipment costing $1,500 will be purchased for cash in April.
h. Management would like to maintain a minimum cash balance of at least $4,000 at the end
of each month. The company has an agreement with a local bank that allows the company to
borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of
$20,000. The interest rate on these loans is 1% per month and for simplicity we will assume
that interest is not compounded. The company would, as far as it is able, repay the loan plus
accumulated interest at the end of the quarter.
Required:
Using the preceding data:
1.   Complete the following schedule:


:
2. Complete the following:
Schedule of Expected Cash Collections
April May June Quarter
Cash sales . . . . . . . . . . . . . . . . . . . . . . . $36,000
Credit sales . . . . . . . . . . . . . . . . . . . . . . 20,000
Total collections . . . . . . . . . . . . . . . . . . . $56,000

Complete the following:

Merchandise Purchases Budget
April May June Quarter
Budgeted cost of goods sold . . . . . . . . . . $45,000 * $54,000  
Add desired ending inventory . . . . . . . . . . 43,200 †
Total needs . . . . . . . . . . . . . . . . . . . . . . . . 88,200
Less beginning inventory . . . . . . . . . . . . . 36,000
Required purchases . . . . . . . . . . . . . . . . . $52,200
*For April sales: $60,000 sales 3 75% cost ratio 5 $45,000.
† $54,000 3 80% 5 $43,200

Schedule of Expected Cash Disbursements—Merchandise Purchases
April May June Quarter
March purchases . . . . . . . . . . . . . . . . . . . $21,750 $21,750
April purchases . . . . . . . . . . . . . . . . . . . . 26,100 $26,100 52,200
May purchases . . . . . . . . . . . . . . . . . . . .
June purchases . . . . . . . . . . . . . . . . . . . .
Total disbursements . . . . . . . . . . . . . . . . $47,850

Complete the following cash budget:

Cash Budget
April May June Quarter
Beginning cash balance . . . . . . . . . . . . . $ 8,000
Add cash collections . . . . . . . . . . . . . . . . 56,000
Total cash available . . . . . . . . . . . . . . . . . 64,000
Less cash disbursements:
For inventory . . . . . . . . . . . . . . . . . . . . 47,850
For expenses . . . . . . . . . . . . . . . . . . . . 13,300
For equipment . . . . . . . . . . . . . . . . . . . 1,500
Total cash disbursements . . . . . . . . . . . . 62,650
Excess (deficiency) of cash . . . . . . . . . . . 1,350
Financing:
Etc.

4. Prepare an absorption costing income statement, similar to the one shown in Schedule 9 in the
chapter, for the quarter ended June 30.
5. Prepare a balance sheet as of June 30.

Answer 1

Solution 1:

Schedule of expected cash collections
Particulars	April	May	June	Quarter
Budgeted Sales	$60,000.00	$72,000.00	$90,000.00	$222,000.00
Cash Sale	$36,000.00	$43,200.00	$54,000.00	$133,200.00
Collection for credit sales	$20,000.00	$24,000.00	$28,800.00	$72,800.00
Total Collections	$56,000.00	$67,200.00	$82,800.00	$206,000.00

Solution 2:

Merchandise Purchase Budget
Particulars	April	May	June	Quarter
Budgeted Cost of Goods Sold (75% of Sales)	$45,000.00	$54,000.00	$67,500.00	$166,500.00
Add: Desired ending merchandise inventory (80% of next month COGS)	$43,200.00	$54,000.00	$28,800.00	$28,800.00
Total Needs	$88,200.00	$108,000.00	$96,300.00	$195,300.00
Less: Beginning inventory	$36,000.00	$43,200.00	$54,000.00	$36,000.00
Required purchases	$52,200.00	$64,800.00	$42,300.00	$159,300.00

Schedule of expected cash disbursement - Merchandise Purchases
Particulars	April	May	June	Quarter
March Purchases	$21,750.00			$21,750.00
April Purchases	$26,100.00	$26,100.00		$52,200.00
May Purchases		$32,400.00	$32,400.00	$64,800.00
June Purchases			$21,150.00	$21,150.00
Total Disbursement	$47,850.00	$58,500.00	$53,550.00	$159,900.00

Solution 3:

Cash Budget - Shilow company
Particulars	April	May	June	Quarter
Opening Cash balance	$8,000.00	$4,350.00	$4,590.00	$8,000.00
Add: Collection from customers	$56,000.00	$67,200.00	$82,800.00	$206,000.00
Total Cash Available	$64,000.00	$71,550.00	$87,390.00	$214,000.00
Less - Cash Disbursement:
For Inventory	$47,850.00	$58,500.00	$53,550.00	$159,900.00
For Expenses	$13,300.00	$15,460.00	$18,700.00	$47,460.00
For Equipment	$1,500.00	$0.00	$0.00	$1,500.00
Total Cash disbursement	$62,650.00	$73,960.00	$72,250.00	$208,860.00
Excess (deficiency) of cash available over disbursements	$1,350.00	-$2,410.00	$15,140.00	$5,140.00
Financing:
Borrowings	$3,000.00	$7,000.00	$0.00	$10,000.00
Repayments	$0.00	$0.00	-$10,000.00	-$10,000.00
Interest	$0.00	$0.00	-$230.00	-$230.00
Total Financing	$3,000.00	$7,000.00	-$10,230.00	-$230.00
Ending cash balance	$4,350.00	$4,590.00	$4,910.00	$4,910.00

Solution 4:

Absorption costing income statement - Shilow Company
for quarter ended June 30
Particulars	Amount
Sales	$222,000.00
Cost of goods sold (75%)	$166,500.00
Gross profit	$55,500.00
Operating expenses:
Sales commission	$26,640.00
Rent	$7,500.00
Other expenses	$13,320.00
Depreciation	$2,700.00
Total operating expenses	$50,160.00
Operating income	$5,340.00
Interest expense	$230.00
Net Income	$5,110.00

Solution 5:

Balance Sheet- Shilow Company
30-Jun
Particulars	Amount
Assets:
Cash	$4,910.00
Accounts receivables ($90,000*40%)	$36,000.00
Inventory	$28,800.00
Building and equipment, net ($120,000 +$1,500 - $2,700)	$118,800.00
Total Assets	$188,510.00
Liabilities and stockholder's Equity:
Accounts payable (42,300*50%)	$21,150.00
Common Stock	$150,000.00
Retained Earnings ($12,250 + $5,110)	$17,360.00
Total liabilities and stockholders equity	$188,510.00