Problem

Nordic Company, a merchandising company, prepares its master budget on a quarterly basis....

Nordic Company, a merchandising company, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparation of the master budget for the second quarter.

a. As of March 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances:

Cash

$ 9,000

 

Accounts receivable

48,000

 

Inventory

12,600

 

Buildings and equipment (net)

214,100

 

Accounts payable

 

$18,300

Capital stock

 

190,000

Retained earnings

 

75,400

 

$283,700

$283,700

b. Actual sales for March and budgeted sales for April-July are as follows:

March (actual)

$60,000

April

$70,000

May

$85,000

June

$90,000

July

$50,000

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

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

e. Monthly selling and administrative expenses are budgeted as follows: salaries and wages. $7,500 per month; shipping, 6% of sales; advertising, $6,000 per month; other expenses, 4% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $6,000 for the quarter.

f. Each month’s ending inventory should equal 30% of the following month's cost of goods sold.

g. Half of a month’s inventory purchases are paid for in the month of purchase and half in the following month.

h. Equipment purchases during the quarter will be as follows: April, $11.500; and May, $3,000.

i. Dividends totaling $3,500 will be declared and paid in June.

j. Management wants to maintain a minimum cash balance of $8,000. 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, 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 data above, complete the following statements and schedules for the second quarter:

1. Schedule of expected cash collections:

 

April

May

June

Total

Cash sales

$14,000

 

 

 

Credit sales

48,000

 

 

 

Total collections

$62,000

 

 

 

a. Merchandise purchases budget:

 

April

May

June

Total

Budgeted cost of goods sold

$42,000*

$51,000

 

 

Add desired ending inventory

15,300

 

 

 

Total needs

57,300

 

 

 

Less beginning inventory

12,600

 

 

 

Required purchases

$44,700

 

 

 

*$70,000 saies × 60% = $42,000.

$51,000 × 30% = $15,300.

b. Schedule of expected cash disbursements for merchandise purchases:

 

April

May

June

Total

For March purchases

$18,300

 

 

$18,300

For April purchases

22,350

$22,350

 

44,700

For May purchases

 

 

 

 

For June purchases

 

 

 

 

Total cash disbursements for purchases

$40,650

 

 

 

3. Schedule of expected cash disbursements for selling and administrative expenses:

 

April

May

June

Total

Salaries and wages

$ 7,500

 

 

 

Shipping

4,200

 

 

 

Advertising

6,000

 

 

 

Other expenses

2,800

 

 

 

Total cash disbursements for selling and administrative expenses

$20,500

 

 

 

4. Cash budget:

 

April

May

June

Total

Cash balance, beginning

$ 9,000

 

 

 

Add cash collections

62,000

 

 

 

Total cash available

71,000

 

 

 

Less cash disbursements:

 

 

 

 

For inventory purchases

40,650

 

 

 

For selling and administrative expenses

20,500

 

 

 

For equipment purchases

11,500

 

 

 

For dividends

 

 

 

 

Total cash disbursements

72,650

 

 

 

Excess (deficiency) of cash

(1,650)

 

 

 

Financing

 

 

 

 

Etc.

 

 

 

 

5. Prepare an absorption costing income statement for the quarter ending June 30 as shown in Schedule 9 in the chapter.

6.Prepare a balance sheet as of June 30.

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