Question

Problem 8-31 Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10]

Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter:

1. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

Cash	$	48,000
Accounts receivable		206,400
Inventory		58,950
Buildings and equipment (net)		358,000
Accounts payable			$	87,525
Common stock				500,000
Retained earnings				83,825
	$	671,350	$	671,350

2. Actual sales for December and budgeted sales for the next four months are as follows:

December(actual)	$	258,000
January	$	393,000
February	$	590,000
March	$	304,000
April	$	201,000

3. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales.

4. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

5. Monthly expenses are budgeted as follows: salaries and wages, $23,000 per month: advertising, $63,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $43,380 for the quarter.

6. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

7. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month.

8. During February, the company will purchase a new copy machine for $1,800 cash. During March, other equipment will be purchased for cash at a cost of $74,000.

9. During January, the company will declare and pay $45,000 in cash dividends.

10. Management wants to maintain a minimum cash balance of $30,000. 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. 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 data above, complete the following statements and schedules for the first quarter:

1. Schedule of expected cash collections:

2-a. Merchandise purchases budget:

2-b. Schedule of expected cash disbursements for merchandise purchases:

3. Cash budget:

4. Prepare an absorption costing income statement for the quarter ending March 31.

5. Prepare a balance sheet as of March 31.

Answer 1

Hillyard Company Sales Budget For the Quarter ended March 30,2011 January February 393000 March Quarter 590000 304000_ 1287000 Budgeted Sales in Dollars Total Budgeted Sales 393000 590000 304000 1287000 Hillyard Company Expected Cash Collection For the Quarter ended March 30,2011 January February 206400 March Quarter 206400 78600 78600 314400 314400 Account Receivable 12/31(80% of 258000) January-11 Sales 20% of 393000 80% of 393000 February-2011 Sales 20% of 590000 80% of 590000 March-2011 Sales 20% of 304000 Total Cash Collection 1180001 118000 472000 472000 60800 432400532800 60800 1250200 285000 Hillyard Company Inventory Purchase Budget For the Quarter ended March 30,2011 Budgeted Cost of Goods Sold(60% of Sales) Add: Desired Ending Inventory(25% of Next Month's COGS) Total Needs Less: Beginning Inventory Required Inventory Purchase January February 235800 88500 324300 58950 265350 March Quarter 3540001 182400 7 722001 45600 31500 3 1500 399600 2139001 803700 885001 45600 58950 311100 168300 744750

Hillyard Company
Cash Disbursement for Purchase
For the Quarter ended March 30,2011
						January	February	March	Quarter
	December Purchase					87525			87525
	January Purchase(50% 0f 265350)					132675	132675		265350
	February Purchase(50% 311100)						155550	155550	311100
	March Purchase(50% of 168300)							84150	84150
	Total cash Disbursement for Purchase					220200	288225	239700	748125

Hillyard Company Cash Disbursement for operating Expenses For the Quarter ended March 30,2011 Salaries and Wages Advertising Shipping (5% of Sales) Other Expenses(3% of Sales) Total Cash Disbursement January February 230001 63000 19650 117901 117440 March Quarter 23000 23000 69000 63000 63000 189000 29500 15200 64350 17700 9 120 38610 133200 110320 360960 Hillyard Company Cash Budget For the Quarter ended March 30,2011 January February 48000 T 285000 333000 March Quarter 30360 39535 4 8000 432400532800 1250200 4627605723351298200 7202001 117440 Beginning Cash Balance Add: Cash Collection Total Cash Available Less: Cash Disbursement Inventory Purchase Operating Expense Equipment Purchase Cash Dividend Total Cash Disbursement Excess/Deficiency Financing: Borrowing Repayments Interest( 80000*12%*3/12) Total Financing Ending Cash Balance 288225 239700 133200 110320 1800 74000 al al 423225 424020 39535148315 450001 382640 -496401 748125 360960 75800 45000 1229885 68315 80000 0 00 0 -80000 0 -2400 0 -82400 39535 65915 80000 -800001 -2400 -2400 65915 800001 303601 Hillyard Company Budgeted Income Statement For the Quarter ended March 30,2011 Sales Less: Cost of Goods Sold Gross Margin Less: Operating Expenses Depreciation Operating Income Less: Interest Expense Net Income 1287000 7722001 514800 360960 43380) 110460 2400 108060 Hillyard Company Budgeted Balance Sheet For the Quarter ended March 30, 2011 Current Assets Cash Account Receivable(80% of 304000) Inventory Total Current Assets Building and Equipment (Beginning 358000+New purchase (1800+74000)-Depreciation 43380) Total Assets 65915 243200 31500 340615 390420 731035 841501 500000 Liabilities and Equity Account Payable(50% of 172800) Notes payable Equity: Common Stock Retained Earnings: Beginning add: Net Income Total Less: Cash Dividend Total Liability and Equity 83825 108060 191885 45000 146885 731035