Question

Hancock 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 December 31 (the end of the prior quarter), the company’s balance sheet showed the following account balances:

Cash	$	13,100
Accounts receivable		55,800
Inventory		18,620
Buildings and equipment (net)		135,000
Accounts payable			$	47,000
Common stock				115,000
Retained earnings				60,520
	$	222,520	$	222,520

b.	Actual and budgeted sales are as follows:

December(actual)	$ 93,000
January	$ 133,000
February	$ 194,000
March	$ 102,000
April	$ 100,000

c.	Sales are 40% for cash and 60% on credit. All payments on credit sales are collected in the month following the sale. The accounts receivable at December 31 are a result of December credit sales.
d.	The company's gross margin percentage is 30% of sales. (In other words, cost of goods sold is 70% of sales.)
e.	Each month's ending inventory should equal 20% of the following month's budgeted cost of goods sold.
f.	One-quarter of a month's inventory purchases is paid for in the month of purchase; the other three- quarters is paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory.
g.	Monthly expenses are as follows: commissions, $27,500; rent, $4,150; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $4,050 for the quarter and includes depreciation on new assets acquired during the quarter.
h.	Equipment will be acquired for cash: $5,330 in January and $9,600 in February.
i.	Management would like to maintain a minimum cash balance of $7,000 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 $50,000. 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:

               

2a.	Merchandise purchases budget.

     

         

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

*Beginning balance of the accounts payable.

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

4.	Cash budget. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

5.	Prepare an absorption costing income statement for the quarter ending March 31. (Losses should be indicated by a minus sign.)

6.	Prepare a balance sheet as of March 31.(Round your answers to the nearest whole number.)

Answer 1

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Sales Budget	December	January	February	March	Total	April	Note
Budgeted Sales Revenue	93,000.00	133,000.00	194,000.00	102,000.00	429,000.00	100,000.00	A
Cash sale is 40%	37,200.00	53,200.00	77,600.00	40,800.00	171,600.00	40,000.00	B=A*40%
Credit sale is 60%	55,800.00	79,800.00	116,400.00	61,200.00	257,400.00	60,000.00	C=A*60%
Collection Budget		January	February	March	Total
Cash sale		53,200.00	77,600.00	40,800.00	171,600.00		B
Credit sale		55,800.00	79,800.00	116,400.00	252,000.00		D=C of previous month, For January take from Balance Sheet
Total Scheduled Collections		109,000.00	157,400.00	157,200.00	423,600.00		E=B+D
Cost of Goods Sold	December	January	February	March	Total	April
Budgeted Cost of Goods Sold - 70% of sales	65,100.00	93,100.00	135,800.00	71,400.00	300,300.00	70,000.00	F=A*70%
Closing stock @ 20%	18,620.00	27,160.00	14,280.00	14,000.00			G=F*20%
Opening Stock		18,620.00	27,160.00	14,280.00			H=G of previous month, For January take from Balance Sheet
Required Purchases		101,640.00	122,920.00	71,120.00	295,680.00		I=F+G-H

Cash Payment for Inventory	January	February	March	Total
Required Purchases	101,640.00	122,920.00	71,120.00	295,680.00	I
Payment of current month- 1/4	25,410.00	30,730.00	17,780.00	73,920.00	J=I*1/4
Payment of prior month- 3/4	47,000.00	76,230.00	92,190.00	215,420.00	K= 3/4 of I of Previous month
Cash Payment for Inventory	72,410.00	106,960.00	109,970.00	289,340.00
Operating expenses Budget	January	February	March	Total
Commission	27,500.00	27,500.00	27,500.00	82,500.00
Rent	4,150.00	4,150.00	4,150.00	12,450.00
Other Expenses- 8% of sales	10,640.00	15,520.00	8,160.00	34,320.00	L= A*8%
Depreciation	1,350.00	1,350.00	1,350.00	4,050.00
Operating expenses	43,640.00	48,520.00	41,160.00	133,320.00
Operating expenses Payment Budget	January	February	March	Total
Commission	27,500.00	27,500.00	27,500.00	82,500.00
Rent	4,150.00	4,150.00	4,150.00	12,450.00
Other Expenses- 8% of sales	10,640.00	15,520.00	8,160.00	34,320.00	L= A*8%
Total cash payments for Operating expenses	42,290.00	47,170.00	39,810.00	129,270.00

Cash budget	January	February	March	Total
Beginning Cash Balance	13,100.00	20,070.00	20,740.00
Plus: Collections	109,000.00	157,400.00	157,200.00	423,600.00
Cash Available	122,100.00	177,470.00	177,940.00	477,510.00
Disbursements				-
Equipment	5,330.00	9,600.00	-	14,930.00
Cash Payment for Inventory	72,410.00	106,960.00	109,970.00	289,340.00
Operating expenses Payment	42,290.00	47,170.00	39,810.00	129,270.00
Total cash payments	120,030.00	163,730.00	149,780.00	433,540.00
Preliminary cash balance	2,070.00	13,740.00	28,160.00
Borrowing during the month	18,000.00	7,000.00	-
Repaid during the month	-	-	(7,000.00)
Interest paid	-	-	(1,040.00)	(1,040.00)
Ending cash balance	20,070.00	20,740.00	20,120.00

Loan Balance	October	November	December	Total
Opening Balance	-	18,000.00	25,000.00
Borrowing during the month	18,000.00	7,000.00	-
Repaid during the month	-	-	(7,000.00)
Closing Balance	18,000.00	25,000.00	18,000.00
Interest at 1 %	540.00	500.00		1,040.00
Period	3 months	2 months

Income Statement	Amount ($)
Sales revenue	429,000.00
Cost of goods sold	300,300.00
Gross margin	128,700.00
S&A expenses	133,320.00
Operating income	(4,620.00)
Interest expense	1,040.00	Take this from Cash Budget
Net income	(5,660.00)
Net income	(5,660.00)
Opening Retained earnings	60,520.00
Closing Retained earnings	54,860.00
Balance Sheet	Amount ($)
Assets
Cash	20,120.00	Closing cash Balance from Cash Budget
Accounts receivable	61,200.00	Credit Sale figure of December
Inventory	14,000.00	Closing Stock figure of December
Equipment	149,930.00	135,000+5,330+9,600
Accumulated depreciation	(4,050.00)
Total assets	241,200.00
Liabilities
Accounts payable	53,340.00	3/4 of purchases of December month.
Line of credit liability	18,000.00	Closing Loan Balance
Total liabilities	71,340.00
Equity
Common stock	115,000.00
Retained earnings	54,860.00	See Workings
Total equity	169,860.00
Total liabilities and equity	241,200.00