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 $ 36,000 Accounts receivable 520,000 Inventory 150,000 Total current assets $ 706,000 Equipment 648,000 Less: accumulated depreciation 81,000 Equipment, net 567,000 Total assets $ 1,273,000 Liabilities and Equity Accounts payable $ 365,000 Bank loan payable 16,000 Taxes payable (due 3/15/2018) 90,000 Total liabilities $ 471,000 Common stock 474,000 Retained earnings 328,000 Total stockholders’ equity 802,000 Total liabilities and equity $ 1,273,000 To prepare a master budget for January, February, and March of 2018, management gathers the following information. The company’s single product is purchased for $30 per unit and resold for $56 per unit. The expected inventory level of 5,000 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, 9,000 units; March, 10,750 units; and April, 9,500 units. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 59% is collected in the first month after the month of sale and 41% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $125,000 is collected in January and the remaining $395,000 is collected in February. 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, $80,000 is paid in January and the remaining $285,000 is paid in February. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $60,000 per year. General and administrative salaries are $132,000 per year. Maintenance expense equals $2,000 per month and is paid in cash. 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, $98,400; and March, $21,600. 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. The company plans to buy land at the end of March at a cost of $155,000, which will be paid with cash on the last day of the month. 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 $32,840 at the end of each month. The income tax rate for the company is 41%. 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 sales budgets. 2. Monthly merchandise purchases budgets. 3. Monthly selling expense budgets. 4. Monthly general and administrative expense budgets. 5. Monthly capital expenditures budgets. 6. Monthly cash budgets. 7. Budgeted income statement for the entire first quarter (not for each month). 8. Budgeted balance sheet as of March 31, 2018.

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	$	36,000
Accounts receivable		520,000
Inventory		150,000
Total current assets				$	706,000
Equipment		648,000
Less: accumulated depreciation		81,000
Equipment, net					567,000
Total assets				$	1,273,000
Liabilities and Equity
Accounts payable	$	365,000
Bank loan payable		16,000
Taxes payable (due 3/15/2018)		90,000
Total liabilities				$	471,000
Common stock		474,000
Retained earnings		328,000
Total stockholders’ equity					802,000
Total liabilities and equity				$	1,273,000

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 $30 per unit and resold for $56 per unit. The expected inventory level of 5,000 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, 9,000 units; March, 10,750 units; and April, 9,500 units.
2. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 59% is collected in the first month after the month of sale and 41% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $125,000 is collected in January and the remaining $395,000 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, $80,000 is paid in January and the remaining $285,000 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 $132,000 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, $98,400; and March, $21,600. 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 $155,000, 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 $32,840 at the end of each month.
9. The income tax rate for the company is 41%. 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

7. Budgeted income statement for the entire first quarter (not for each month).
8. Budgeted balance sheet as of March 31, 2018.

Answer 1

1. a.

Sales Budget
	Jan	Feb	Mar	Total
Budgeted sales in units	7,000	9,000	10,750	26,750
Sales price per unit	$ 56	$ 56	$ 56	$ 56
Budgeted sales revenue	$ 392,000	$ 504,000	$ 602,000	$ 1,498,000

b.

Schedule of Cash Collections from Sales
	Jan	Feb	Mar	Total
Cash Sales	$ 98,000	$ 126,000	$ 150,500	374,500
Collection of accounts receivable	125,000	395,000		520,000
Jan credit sales		173,460	120,540	294,000
Feb credit sales			223,020	223,020
Total Cash Collections	$ 223,000	$ 694,460	$ 494,060	$ 1,411,520

2.a.

Merchandise Purchase Budget
	Jan	Feb	Mar	Total	Apr
Budgeted sales in units	7,000	9,000	10,750	26,750	9,500
Add: Desired ending inventory	1,800	2,150	1,900	1,900
Total inventory needed	8,800	11,150	12,650	28,650
Less: Beginning inventory	5,000	1,800	2,150	5,000
Required purchases in units	3,800	9,350	10,500	23,650
Cost per unit	$ 30	$ 30	$ 30	$ 30
Budgeted cost of merchandise purchases	114,000	280,500	315,000	709,500

b.

Schedule of Cash Disbursements for Merchandise Purchases
	Jan	Feb	Mar	Total
Payment of Dec accounts payable	$ 80,000	$ 285,000		$ 365,000
Payment for Jan purchases		22,800	91,200	114,000
Payment for Feb purchases			56,100	56,100
Total Cash Disbursements	$ 80,000	$ 307,800	147,300	$ 535,100

3.

Selling Expense Budget
	Jan	Feb	Mar	Total
Sales Commission	$ 78,400	$ 100,800	$ 120,400	$ 299,600
Sales Salaries	5,000	5,000	5,000	15,000
Budgeted Selling Expenses	83,400	105,800	125,400	314,600

4.

General and Administrative Expense Budget
	Jan	Feb	Mar	Total
General and Administrative Salaries	$ 11,000	$ 11,000	$ 11,000	$ 33,000
Maintenance Expenses	2,000	2,000	2,000	6,000
Budgeted General and Administrative Expenses	13,000	13,000	13,000	39,000

5.

Capital Expenditures Budget
	Jan	Feb	Mar	Total
Purchase of Equipment	$ 33,600	$ 98,400	$ 21,600	$ 153,600
Purchase of Land	0	0	155,000	155,000
Budgeted Capital Expenditures	$ 33,600	$ 98,400	$ 176,600	$ 308,600

6.

Cash Budget For the three months ending March 31, 2018
	Jan	Feb	Mar	Total
Beginning cash balance	$ 36,000	$ 32,840	$ 202,300	$ 36,000
Add: Cash receipts	223,000	694,460	494,060	1,411,520
Total cash available	259,000	727,300	696,360	1,447,520
Less: Cash Disbursements for
Merchandise purchases	80,000	307,800	147,300	535,100
Selling Expenses	83,400	105,800	125,400	314,600
General and Administrative Expenses	13,000	13,000	13,000	39,000
Capital Expenditures	33,600	98,400	176,600	308,600
Income Taxes	0	0	90,000	90,000
Interest on bank loan	160	0	0	160
Total Cash Disbursements	210,160	525,000	552,300	1,287,460
Cash Surplus ( Deficiency)	48,840	202,300	144,060	160,060
Financing
Borrowing	0	0	0	0
Repayment	(16,000)	0	0	(16,000)
Total Financing	0	0	0
Ending cash balance	32,840	202,300	144,060	144,060

7.

Budgeted Income Statement For the quarter ended March 31, 2018
Budgeted Sales Revenue		$ 1,498,000
Budgeted Cost of Goods Sold		802,500
Gross Profit		695,500
Selling, General and Administrative Expenses
Selling Expenses	314,600
General and Administrative Expenses	39,000
Depreciation Expense	23,575
Interest expense	160
Total Selling, General and Administrative Expenses		377,335
Income before Taxes		318,165
Income Tax Expense @ 41 %		130,448
Net Income		$ 187,717

8.

Budgeted Balance Sheet March 31, 2018
Assets
Cash	144,060
Accounts Receivable	606,480
Inventory	57,000
Total current assets		807,540
Land		155,000
Equipment	801,600
Accumulated Depreciation: Equipment	(104,575)
Equipment, net		697,025
Total Assets		$ 1,659,565
Liabilities and Stockholders' Equity
Accounts Payable	539,400
Income Taxes Payable	130,448
Total Liabilities		669,848
Common Stock	474,000
Retained Earnings	515,717
Total Stockholders' Equity		989,717
Total Liabilities and Stockholders' Equity		$ 1,659,565