Question

Near the end of 2011, the management of Simid Sports Co., a merchandising company, prepared the following estimated statement of financial position for December 31, 2011. SIMID SPORTS COMPANY Estimated Statement of Financial position December 31, 2011 Assets Cash $ 37,000 Accounts receivable 520,000 Inventory 100,000 Total current assets 657,000 Equipment $ 540,000 Less accumulated depreciation 67,500 472,500 Total assets $ 1,129,500 Liabilities and Equity Accounts payable $ 345,000 Bank loan payable 15,000 Tax payable (due 3/15/2012) 91,000 Total liabilities $ 451,000 Share capital—ordinary 471,500 Retained earnings 207,000 Total stockholders’ equity 678,500 Total liabilities and equity $ 1,129,500 To prepare a master budget for January, February, and March of 2012, management gathers the following information. a. Simid Sports’ single product is purchased for $20 per unit and resold for $52 per unit. The expected inventory level of 5,000 units on December 31, 2011, is more than management’s desired level for 2012, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,250 units; February, 8,750 units; March, 11,500 units; and April, 10,000 units. b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 65% is collected in the first month after the month of sale and 35% in the second month after the month of sale. For the December 31, 2011, accounts receivable balance, $125,000 is collected in January and the remaining $395,000 is collected in February. c. 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, 2011, accounts payable balance, $90,000 is paid in January and the remaining $255,000 is paid in February. d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $72,000 per year. e. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,100 per month and is paid in cash. f. Equipment reported in the December 31, 2011, statement of financial position was purchased in January 2011. It is being depreciated over eight years under the straight-line method with no residual value. The following amounts for new equipment purchases are planned in the coming quarter: January, $37,000; February, $95,000; and March, $29,000. This equipment will be depreciated under the straight-line method over eight years with no residual value. A full month’s depreciation is taken for the month in which equipment is purchased. g. The company plans to acquire land at the end of March at a cost of $165,000, which will be paid with cash on the last day of the month. h. Simid Sports 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 $18,600 in each month. i. The income tax rate for the company is 35%. Income tax 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 2012; include the following component budgets:

Answer 1

SIMID SPORTS CO Sales Budget For January, February, and March, 2012 Budgeted Unit Sales Budgeted Unit Price Budgeted Total Dollars 52 52 52 anua Februa March Totals for the quarter 7250 8750 11500 27500 377000 455000 598000 1430000 SIMID SPORTS CO Merchandise Purchases Budget January, February, and March 2012 March Februa Total anua Nextmonth's budgeted sales (units) Ratio of inventory to future sales Budgeted ending inventory (units Budgeted units salesfor month Required units of available merchandise Beginning inventory (units Units to be purchased Budgeted cost per unit Budgeted merchandise purchases 11500 20% 2300 8750 11050 1750 9300 20 186000 8750 20% 1750 10000 20% 2000 9000 5000 4000 20 80000 13500 2300 11200 24500 20 224000 490000 20

SIMID SPORTS COMPANY Selling Expense Budget January, February, and March 2012 January February March Total Budgeted sales Sales commission percent Sales commissions Sales salaries-72000/12 Total selling expenses 377000 455000 598000 才)% 20% 20% 75400 91000l 119600 286000 6000 600018000 8140097000 125600 304000 (1)

SIMID SPORTS CO General and Administrative Expense Budget January, February, and March 2012 January February March Total Depreciation expense (working 1 Salariesexpense 144000/12 Maintenance expense Total 6010 7000 7302 20313 1200012000 12000 36000 2100 2100 6300 20110 21100 21402 62613 2100 SIMID SPORTS COMPANY Capital Expenditures Budget January, February, and March 2012 January February March Total Equipment purchases Land purchase Total 3700095000 29000 161000 01 165000165000 37000 95000 194000 326000 0

SIMID SPORTS CO Cash Budget January, February, and March, 2012 January February March Beginning cash balance Cash receipts from customers (working 2) 219250 Total cash available Cash disbursements: Payments for merchandise (working 3 Purchase of land Purchasesof equipment General & administrative salaries Maintenance expense Sales commissions Sales salaries Interest on bank loan (16000*196 Taxes payable Total cash disbursements Preliminary cash balan ce Additional loan (loan repayment) Ending cash balance 3700018600 234038 692538 470275 256250711138 704313 90000271000 101200 01 165000 37000 95000 29000 120001200012000 2100 2100 75400 91000 119600 6000 6000 0 091000 0 2100 6000 150 0 0 222650 477100 525900 33600234038 178413 0 18600234038 178413 -15000 0

SIMID SPORTS CO. Budgeted Income State ment For Three Months Ended March 31, 2012 SIMID SPORTS CO Budgeted state ment of financial position March 31, 2012 Sales Cost of goods sold (27,500 units@ $20) Gross profit Operatingexpenses Sales commissions Sales salaries General administrative salaries Maintenance expense Depreciation expense (Working 1) Interest expense 1430000 550000 880000 ASSETS Cash Accountsreceivable (working 2) Inventory 2000 20 Total current assets Land Equipment Less accumulated depreciation -67500+2031387813 Equipment ,net Total assets 178413 567938 40000 786350 165000 286000 18000 36000 6300 20313 150 701000 613188 1564538 366763 513238 179633 LIABILITIES AND EQUITY Accountspayable (working 3) Bank loan payable Taxes payable (due 4/15/2012) Total liabilities Total Operating expense Income before taxes Income taxes (35%) Net income 372800 0 552433 Common stock Retained earnings 228500+164903 Total stockholders' equity Total liabilities and equity 471500 540604 1012104 1564538

working 1: January February March Total oment-beginningof month 54000 577000 672000 Equipment purchases Equipment - end of month (X) Monthly depreciation expense X/9660107302 20313 540000 577000 672000 370009500029000 577000672000 701000