Question

Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$18 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual)	22,800	June (budget)	52,800
February (actual)	28,800	July (budget)	32,800
March (actual)	42,800	August (budget)	30,800
April (budget)	67,800	September (budget)	27,800
May (budget)	102,800

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $5.40 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	340,000
Rent	$	32,000
Salaries	$	134,000
Utilities	$	14,000
Insurance	$	4,400
Depreciation	$	28,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $23,000 in new equipment during May and $54,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $25,500 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$	88,000
Accounts receivable ($51,840 February sales; $616,320 March sales)		668,160
Inventory		146,448
Prepaid insurance		28,000
Property and equipment (net)		1,090,000
Total assets	$	2,020,608
Liabilities and Stockholders’ Equity
Accounts payable	$	114,000
Dividends payable		25,500
Common stock		1,080,000
Retained earnings		801,108
Total liabilities and stockholders’ equity	$	2,020,608

The company maintains a minimum cash balance of $64,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a 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. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $64,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30.

Answer 1

a
The answer is at the end
Schedule of Cash collection
	April	May	June	Total			July	August
Sales in units A	67800	102800	52800	223400			32800	30800
Sale Price	$18	18	18	18			18	18
Sales in value	1220400	1850400	950400	4021200			590400	554400
Feb sales	51840			51840
Marc sales (70%,10% of (616320/80%*100))	539280	77040		616320			678400
April sales (20%,70%,10%)	244080	854280	122040	1220400
May Sales		370080	1295280	1665360
June sales			190080	190080
Total A	835200	1301400	1607400	3744000
Accounts Receivable May 1850400*.1+June 950400*.8=			945360
Note 2
Purcahse Budget	April	May	June	Total			July
Units to be sold	67800	102800	52800	223400			32800
Closing Inventory 40% of next month sales S*.4	41120	21120	13120	13120
Total Finised Googd	108920	123920	65920	236520
Less: Beginning Inventory	27120	41120	21120	27120
Units to be produced	81800	82800	44800	209400
Purchase Price	5.4	5.4	5.4	5.4
Total Purchase price A	441720	447120	241920	1130760
COGS= Units sold*5.4	366120	555120	285120	1206360
Cash Disbursement Schedule
From march purchases	114000			114000
From April Purchases	220860	220860		441720
From May Purchases		223560	223560	447120
From June purchases			120960	120960
Total B	334860	444420	344520	1123800
Accounts payable as on 30 June		120960
working
Cash payments
payment of Inventory	334860	444420	344520	1123800
Sales Commissions @ 4%	48816	74016	38016	160848
Advertising	340000	340000	340000	1020000
Rent	32000	32000	32000	96000
Salaries	134000	134000	134000	402000
Utilities	14000	14000	14000	42000
Dividend Paid	25500			25500
Equipment purchased		23000	54000	77000
	April	May J	June	Total
Beginning Cash balance	88000	$64,024	$232,588	88000
Cash receipt	835200	1301400	1607400	3744000
Total cash available	923200	1365424	1839988	3832000
Less: Cash Disbursements
payment of Inventory	334860	444420	344520	1123800
Sales Commissions @ 4%	48816	74016	38016	160848
Advertising	340000	340000	340000	1020000
Rent	32000	32000	32000	96000
Salaries	134000	134000	134000	402000
Utilities	14000	14000	14000	42000
Dividend Paid	25500	0	0	25500
Equipment purchased	0	23000	54000	77000
Total cash Disbursements	$929,176	$1,061,436	$956,536	$2,947,148
Excess /(deficiency) of cash receipts over cash disbursements	($5,976)	$303,988	$883,452	$884,852
Minimum Cash balance (working)	64000	64000	64000	64000
Financing
Borrowed	70000			$70,000
Repaid		-70000		($70,000)
Interest Repaid		-1400		($1,400)
Total financing	70000	-71400	0	-1400
Ending Cash balance	$64,024	$232,588	$883,452	$883,452
Dear student the month wise income staement is for your understanding
Income Statement as on 3o June 2016
	April	May	June	Total
Sales	1220400	1850400	950400	4021200	####
Less: variable Cost
Cost of Good Sold	366120	555120	285120	1206360
Sales Commissions @ 4%	48816	74016	38016	160848
Contribution	805464	1221264	627264	2653992
Fixed Expenses
Advertising	340000	340000	340000	1020000
Salaries	32000	32000	32000	96000
Utilities	134000	134000	134000	402000
Rent	14000	14000	14000	42000
Insurance	4400	4400	4400	13200
Depreciation	28000	28000	28000	84000
total fixed expenses	552400	552400	552400	1657200
Operating Income	253064	668864	74864	996792
Interest On Short Term Loan	700	700		1400
Net Income	252364	668164	74864	995392
ans 3
Income statement
For the three months period
Sales		4021200
Less: variable Cost
Cost of Good Sold	1206360
Sales Commissions @ 4%	160848
Total variable expenses		1367208
Contribution		2653992
Fixed Expenses
Advertising	1020000
Salaries	96000
Utilities	402000
Rent	42000
Insurance	13200
Depreciation	84000
total fixed expenses		1657200
Operating Income		996792
Interest On Short Term Loan		-1400
Net Income		995392
Net Income
Statement of Retained earnings
Opening balance	801108
Add: Net Income for the year	995392
Less: Dividend payable	-25500
Balance June 30	1771000
BalANCE Sheet as on 30 June
Assets
Cash	883452
Accounts Receivable	945360
Inventory	70848
Prepaid Insurance=(28000-(4400*3))	14800
Property & Equipment (1090000+77000)	1167000
Less: Accumulated Depreciation	-84000
	2997460
Liabilities & Stockholder equity
Accounts payable	120960
Dividend Payable	25500
Total Laibilities	146460
Stockholder Equity
Common Stock	1080000
Retained earnings	1771000
Total Stockholder Equity	2851000
TotalLiabilities & Stockholder Equity	2997460
If any doubt please comment