Question

Near 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	$	36,000
Accounts receivable		525,000
Inventory		150,000
Total current assets				$	711,000
Equipment		540,000
Less: accumulated depreciation		67,500
Equipment, net					472,500
Total assets				$	1,183,500
Liabilities and Equity
Accounts payable	$	360,000
Bank loan payable		15,000
Taxes payable (due 3/15/2018)		90,000
Total liabilities				$	465,000
Common stock		472,500
Retained earnings		246,000
Total stockholders’ equity					718,500
Total liabilities and equity				$	1,183,500

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 $30 per unit and resold for $55 per unit. The expected inventory level of 5,000 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, 10,000 units.

Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% 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 $400,000 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, $80,000 is paid in January and the remaining $280,000 is paid in February.

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

General and administrative salaries are $144,000 per year. Maintenance expense equals $2,000 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, $36,000; February, $96,000; and March, $28,800. 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 $25,000 at the end of each month.

The income tax rate for the company is 40%. 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.

I have already solved 1-5. Stuck on the last three (6-8).

Answer 1

1.

Sales Budget
	January	February	March	Total
Unit Sales	7000	9000	11000	27000
Unit selling price	55	55	55	55
Budgeted Sales	385000	495000	605000	1485000
Cash Sales	96250	123750	151250	371250
Credit Sales	288750	371250	453750	1113750

2.

Merchandise Purchase Budget
	January	February	March	Total
Budgeted Sales Units	7000	9000	11000	27000
Add: Ending inventory	1800	2200	2000	2000
(20% of next month's sales)
Units required	8800	11200	13000	29000
Less: Beginning Inventory	5000	1800	2200	5000
Budgeted Purchase units	3800	9400	10800	24000
Cost per unit	30	30	30	30
Budgeted Purchases	114000	282000	324000	720000

3.

Selling Expenses Budget
	January	February	March	Total
Sales Commission (20% of sales)	77000	99000	121000	297000
Sales Salaries	5000	5000	5000	15000
Budgeted selling expenses	82000	104000	126000	312000

4.

General and Administrative expenses budget
	January	February	March	Total
General and Administrative expenses	12000	12000	12000	36000
Maintenace expenses	2000	2000	2000	6000
Total expenses	14000	14000	14000	42000

5.

Capital Expenditure Budget
	January	February	March	Total
Purchase of Equipment	36000	96000	28800	160800
Purchase of land			150000	150000
Total Capital expenditure	36000	96000	178800	310800

6.

Cash Budget
	January	February	March	Total
Beginning Cash Balance	36000	45250	225450	36000
Collection from sales	221250	697000	545188	1463438
Total cash available for disbursements	257250	742250	770638	1499438
Cash disbursements :
For purchase of merchandise	80000	302800	147600	530400
For selling expenses	82000	104000	126000	312000
For general andadministrative expenses	14000	14000	14000	42000
For capital expenditure	36000	96000	178800	310800
For income tax			90000	90000
Total cash disbursemenrs	212000	516800	556400	1285200
Ending cash balance	45250	225450	214238	214238

7.

Budgeted Income Statement
	Total
Sales revenue	1485000
Cost of goods sold	810000
Gross profit	675000
Expenses:
Selling Expenses	312000
General and administration expenses	42000
Depreciation Expense	20300
Total expenses	374300
Income before taxes	300700
Income tax (@40%)	128400
Net income	172300

8.

Budgeted Balance Sheet
As at March 31, 2018
Assets
Cash		158550
Accounts Receivable		602250
Merchandise Inventory (2,000 x $30)		60000
Current Assets		820800
Land		150000
Equipment	700800
Accumulated depreciation	87800
Equipment, net		613000
Total Assets		1583800
Liabilities and Equity
Accounts Payable		549600
Bank loan Payable		15000
Taxes Payable		128400
Current Liabilities		693000
Common stock	472500
Retained earnings                            246000
Net income for the period        172300	418300
Total Equity		890800
Total Liabilities and Equity		1583800