Question

Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as of April 30 is given below:

Minden Company Balance Sheet April 30
Assets
Cash	$	11,400
Accounts receivable		75,000
Inventory		41,000
Buildings and equipment, net of depreciation		224,000
Total assets	$	351,400
Liabilities and Stockholders’ Equity
Accounts payable	$	70,000
Note payable		15,500
Common stock		180,000
Retained earnings		85,900
Total liabilities and stockholders’ equity	$	351,400

The company is in the process of preparing a budget for May and has assembled the following data:

1. Sales are budgeted at $220,000 for May. Of these sales, $66,000 will be for cash; the remainder will be credit sales. One-half of a month’s credit sales are collected in the month the sales are made, and the remainder is collected in the following month. All of the April 30 accounts receivable will be collected in May.

2. Purchases of inventory are expected to total $128,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder are paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May.

3. The May 31 inventory balance is budgeted at $56,000.

4. Selling and administrative expenses for May are budgeted at $86,000, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $6,750 for the month.

5. The note payable on the April 30 balance sheet will be paid during May, with $565 in interest. (All of the interest relates to May.)

6. New refrigerating equipment costing $6,700 will be purchased for cash during May.

7. During May, the company will borrow $25,300 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

Required:

1. Calculate the expected cash collections for May.

2. Calculate the expected cash disbursements for merchandise purchases for May.

3. Prepare a cash budget for May.

4. Prepare a budgeted income statement for May.

5. Prepare a budgeted balance sheet as of May 31.

Answer 1

SOLUTION

1. Schedule of Cash collections-

Particulars	Amount ($)
Cash sales for May	66,000
Accounts receivable collection-
April	75,000
May (220,000-66,000)/2	77,000
Total	218,000

2. Schedule of expected cash disbursements-

Particulars	Amount ($)
Accounts payable	70,000
May purchase (128,000*40%)	51,200
Total	121,200

3. Cash budget-

Particulars	Amount ($)
Beginning cash balance	11,400
Add: Collections from customers	218,000
Total cash available (A)	229,400
Less: Cash disbursements
Purchase of inventory	121,200
Selling and administrative expense	86,000
Purchase of Equipment	6,700
Total cash disbursements (B)	213,900
Excess of cash available over disbursements (A-B)	15,500
Financing-
Borrowing- Note	25,300
Repayment - Note	(15,500)
Interest	(565)
Total financing	9,235
Ending cash balance (15,500+24,735)	24,735

4. Budgeted income statement-

Particulars	Amount ($)	Amount ($)
Sales		220,000
Cost of goods sold
Beginning inventory	41,000
Purchases	128,000
Goods available for sale	169,000
Less: Ending inventory	56,000
Cost of goods sold		113,000
Gross margin		107,000
Selling and administrative expenses (86,000+6,750)		92,750
Net operating income		14,250
Interest expense		565
Net income		13,685

5. Budgeted balance sheet-

Particulars	Amount ($)
Assets
Cash	24,735
Accounts receivable (220,000-66,000)/2	77,000
Inventory	56,000
Building and Equipment (224,000+6,700-6,750)	223,950
Total Assets	381,685
Liabilities and stockholder's Equity
Accounts payable (128,000*60%)	76,800
Notes payable	25,300
Common stock	180,000
Retained earnings (85,900+13,685)	99,585
Total Liabilities and stockholder's Equity	381,685