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Near the end of 2017, the management of Babalu Musical Instrument Co., a new merchandising company,...

Near the end of 2017, the management of Babalu Musical Instrument Co., a new merchandising company, prepared the following estimated balance sheet for December 31, 2017.

BABALU MUSICAL INSTRUMENT COMPANY
Estimated Balance Sheet
December 31, 2017

  Assets

  Liabilities and Equity

  Cash

$36,000

  Accounts payable

$365,000

  Accounts receivable

520,000

  Bank loan payable

15,000

  Inventory

165,000

  Taxes payable (due   3/15/2018)

91,000

  Total current assets

721,000

  Total liabilities

$471,000

  Equipment

$538,000

  Common stock

474,500

  Less accumulated   depreciation

67,250

470,750

  Retained earnings

246,250

  Total stockholders' equity

720,750

  Total assets

$1,191,750

  Total liabilities and equity

$1,191,750

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

a.

Babalu Musical’s single product is purchased for $30 per unit and resold for $55 per unit. The expected inventory level of 5,500 units on December 31, 2017, is more than management’s desired level for 2018, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,250 units; February, 8,750 units; March, 11,500 units; and April, 10,000 units.

b.

Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 70% is collected in the first month after the month of sale and 30% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $125,000 is collected in January and the remaining $395,000 is collected in February.

c.

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, $85,000 is paid in January and the remaining $280,000 is paid in February.

d.

Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $60,000 per year.

e.

General and administrative salaries are $144,000 per year. Maintenance expense equals $2,200 per month and is paid in cash.

f.

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, $34,000; February, $98,000; and March, $29,500. 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.

g.

The company plans to acquire land at the end of March at a cost of $145,000, which will be paid with cash on the last day of the month.

h.

Babalu Musical 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 $27,588 in each month.

i.

The income tax rate for the company is 30%. Income taxes on the first quarter’s income will not be paid until April 15.

Requirements:

Prepare a master budget for each of the first three months of 2018; include the following component budgets (show supporting calculations as needed directly behind that budget, and round amounts to the nearest dollar):

1.) Monthly cash budgets.

2.) Budgeted income statement for the entire first quarter (not for each month).

3.) Budgeted balance sheet as of March 31, 2018

Solutions

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