Question

PART I

L & P Merchandising & More is a family-owned furniture store. You are the management accountant of the concern and have been given the task of preparing the cash budget for the business for the quarter ending December 31, 2020. Your data collection has yielded the following:

(i) Extracts from the sales and purchases budgets are as follows:

Month 2020

August September October November

December

Cash Sales

$121,000 $95,500 $132,680 $105,900

$216,000

Sales On Account

$480,000 $600,000 $720,000 $650,000

$800,000

Purchases On Account

$390,000 $360,000 $480,000 $400,000

$500,000

(ii) An analysis of the records shows that trade receivables (accounts receivable) are settled according to the following credit pattern, in accordance with the credit terms 5/30, n90:

60% in the month of sale

30% in the first month following the sale 10% in the second month following the sale

(iii) Accounts payable are settled as follows, in accordance with the credit terms 3/30, n60: 80% in the month in which the inventory is purchased

20% in the following month

(iv) During November, the management of L & P Merchandising expects to sell an old motor vehicle that cost $650,000 at a gain of $25,000. Accumulated depreciation on this motor vehicle at that time is expected to be $475,000. The employee will be allowed to pay a deposit equal to 40% of the selling price in November and the balance settled in four equal amounts from December 2020 to March of 2021.

(v) Computer Equipment, which is estimated to cost $480,000, will be purchased in December. The manager has made arrangements with the seller to make a cash deposit of 50% of the amount upon signing of the agreement in December, with the balance to be settled in four equal monthly instalments, starting in January 2021.

(vi) A long-term instrument purchased by L & P Merchandising with a face value of $480,000 will mature on October 20, 2020. In order to meet the financial obligations of the business, management has decided to liquidate the investment upon maturity. On that date quarterly interest computed at a rate of 41⁄2% per annum is also expected to be collected.

(vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,040,000 per annum, [including depreciation on non-current assets of $35,000 per month] and are settled monthly.

(viii) Other operating expenses are expected to be $174,000 per quarter and are settled monthly.

(ix) The management of L & P Merchandising has negotiated with a tenant to rent office space to her beginning November 1. The rental is $540,000 per annum. The first month’s rent along with one month’s safety deposit is expected to be collected on November 1. Thereafter, monthly rental income becomes due at the beginning of each month.

(x) Wages and salaries are expected to be $2,940,000 per annum and will be paid monthly.

(xi) At the recently concluded negotiations between management and the union representing the workers it was agreed that L & P Merchandising should make retroactive payments in the amount of $1,520,000 to employees. The payment is being settled in four equal tranches. The third payment becomes due and payable in October of 2020.

  

(xii) The cash balance on December 30, 2020 is expected to be an overdraft of $198,000

Answer 1

Working notes:

1.

Credit terms for sales 5/30, n90:

Collection is done as follows:

60% in the month of sale (5% discount applicable as per credit terms)

30% in the first month following the sale 10% in the second month following the sale

			Schedule of Cash receipts for forecast sales				figures in $
Month	Forecast on account Sales as per budget		August	September	October	November	December	January	February
August	480,000		273,600	144,000	48,000	-	-	-	-
September	600,000		-	342,000	180,000	60,000	-	-	-
October	720,000		-	-	410,400	216,000	72,000	-	-
November	650,000		-	-	-	370,500	195,000	65,000	-
December	800,000		-	-	-	-	456,000	240,000	80,000
Total	3,250,000		273,600	486,000	638,400	646,500	723,000	305,000	80,000

2.

Accounts payable are settled as follows, in accordance with the credit terms 3/30, n60:

80% in the month in which the inventory is purchased (3% discount is applicable as per credit terms)

20% in the following month

			Schedule of Cash payments					figures in $
Month	Forecast Purchases as per budget		August	September	October	November	December	January	February
August	390,000		302,640	78,000	-	-	-	-	-
September	360,000		-	279,360	72,000	-	-	-	-
October	480,000		-	-	372,480	96,000	-	-	-
November	400,000		-	-	-	310,400	80,000	-	-
December	500,000		-	-	-	-	388,000	100,000	-
Total	2,130,000		302,640	357,360	444,480	406,400	468,000	100,000	-

3.

During November, the management of L & P Merchandising expects to sell an old motor vehicle that cost $650,000 at a gain of $25,000. Accumulated depreciation on this motor vehicle at that time is expected to be $475,000. The employee will be allowed to pay a deposit equal to 40% of the selling price in November and the balance settled in four equal amounts from December 2020 to March of 2021.

Book value of the motor vehicle = 650000-475000 = $175,000

Gain on sale = $25,000

Selling price = 175000+25000 = $200,000

As per payment terms:

Payment in November = 40% of 200000 = $80,000

Remaining balance = 200000-80000 = $120,000 in 4 equal amounts from December 2020 to March 2021

Payment in December 2020 = 120000/4 = $30,000

4.

Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,040,000 per annum, [including depreciation on non-current assets of $35,000 per month] and are settled monthly.

Fixed operating expenses per month = 2040000/12 = $170,000

Less: Depreciation per month = $35,000

Fixed operating expenses per month in cash = 170000-35000 = $135,000

L & P Merchandising & More

Cash budget

for the quarter ending December 31, 2020

			figures in $
Particulars	October	November	December
Opening cash balance (Overdraft)	(138,000)	(144,000)	(66,000)
Add: Cash sales	132,680	105,900	216,000
Add: Cash collected from receivables (Working note 1)	638,400	646,500	723,000
Add: Proceeds from sale of vehicle (Working note 3)	-	80,000	30,000
Add: Maturity proceeds of long term investment along with quarterly interest @4.5% p.a. [480000 + (480000*4.5%*3/12)]	485,400	-	-
Add: Rental deposit($540,000/12)	-	45,000	-
Add: Rental income ($540,000/12)	-	45,000	45,000
Less: Cash paid for settling account payables (Working note 2)	444,480	406,400	468,000
Less: Cash deposit for Computer equipment	-	-	240,000
Less: Fixed operating expenses (Working note 4)	135,000	135,000	135,000
Less: Other operating expenses (174000/3)	58,000	58,000	58,000
Less: Wages and salaries($2,940,000/12)	245,000	245,000	245,000
Less: Retroactive payment to employees ($1,520,000/4)	380,000	-	-
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