Question

ear the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017.

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017
Assets
Cash	$	35,500
Accounts receivable		520,000
Inventory		95,000
Total current assets				$	650,500
Equipment		636,000
Less: accumulated depreciation		79,500
Equipment, net					556,500
Total assets				$	1,207,000
Liabilities and Equity
Accounts payable	$	375,000
Bank loan payable		15,000
Taxes payable (due 3/15/2018)		90,000
Total liabilities				$	480,000
Common stock		470,500
Retained earnings		256,500
Total stockholders’ equity					727,000
Total liabilities and equity				$	1,207,000

To prepare a master budget for January, February, and March of 2018, management gathers the following information.

The company’s single product is purchased for $20 per unit and resold for $57 per unit. The expected inventory level of 4,750 units on December 31, 2017, is more than management’s desired level, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,000 units; February, 9,000 units; March, 11,000 units; and April, 11,000 units.

Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 63% is collected in the first month after the month of sale and 37% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $130,000 is collected in January and the remaining $390,000 is collected in February.

Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2017, accounts payable balance, $70,000 is paid in January and the remaining $305,000 is paid in February.

Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $54,000 per year.

General and administrative salaries are $132,000 per year. Maintenance expense equals $1,900 per month and is paid in cash.

Equipment reported in the December 31, 2017, balance sheet was purchased in January 2017. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $38,400; February, $96,000; and March, $26,400. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full month’s depreciation is taken for the month in which equipment is purchased.

The company plans to buy land at the end of March at a cost of $150,000, which will be paid with cash on the last day of the month.

The company has a working arrangement with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of $44,500 at the end of each month.

The income tax rate for the company is 37%. Income taxes on the first quarter’s income will not be paid until April 15.

Required:
Prepare a master budget for each of the first three months of 2018; include the following component budgets:

1. Monthly sales budgets.
2. Monthly merchandise purchases budgets.
3. Monthly selling expense budgets.
4. Monthly general and administrative expense budgets.
5. Monthly capital expenditures budgets.
6. Monthly cash budgets.
7. Budgeted income statement for the entire first quarter (not for each month).
8. Budgeted balance sheet as of March 31, 2018.

Answer 1

1	Sales Budget
	Sales	January	February	March
	Expected Sale In Units	7000	9000	11000
	Selling Price	57	57	57
	Total Sales	399000	513000	627000
	Cash sales 25%	99750	128250	156750
	Credit sales 75%	299250	384750	470250
2	Merchandise purchase Budget	January	February	March
	Sales Units	7000	9000	11000
	Add: Closing stock	1800	2200	2200
	Less: Opening stock	4750	1800	2200
	Purchase (Units)	4050	9400	11000
	Purchase price	20	20	20
	Purchase cost ($)	81000	188000	220000
	*closing stock Jan = 20% of 9000 (feb sales) = 1800
3	*closing stock Feb = 20% of 11000 (March sales) = 2200
	*closing stock March = 20% of 11000 (April Sales) = 2200
	Monthly selling expense Budget	January	February	March
	Sales commission (20% of Sales)	79800	102600	125400
4	Sales salaries (54000 / 12 ) = 4500	4500	4500	4500
	Total selling Expense	84300	107100	129900
	Monthly general and administrative expense Budget	January	February	March
	Salaries (132000 / 12)	11000	11000	11000
	Maintenance expense	1900	1900	1900
	Total general and administrative expense	12900	12900	12900