Question

Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$13 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual)	20,600	June (budget)	50,600
February (actual)	26,600	July (budget)	30,600
March (actual)	40,600	August (budget)	28,600
April (budget)	65,600	September (budget)	25,600
May (budget)	100,600

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $4.30 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	230,000
Rent	$	21,000
Salaries	$	112,000
Utilities	$	8,500
Insurance	$	3,300
Depreciation	$	17,000

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $17,500 in new equipment during May and $43,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $17,250 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets
Cash	$	77,000
Accounts receivable ($34,580 February sales; $422,240 March sales)		456,820
Inventory		112,832
Prepaid insurance		22,500
Property and equipment (net)		980,000
Total assets	$	1,649,152
Liabilities and Stockholders’ Equity
Accounts payable	$	103,000
Dividends payable		17,250
Common stock		860,000
Retained earnings		668,902
Total liabilities and stockholders’ equity	$	1,649,152

The company maintains a minimum cash balance of $53,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $53,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $53,000.

Prepare a master budget for the three-month period ending June 30 that includes a cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $53,000. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance Add collections from customers Total cash available 0 0 0 0 Less cash disbursements: Merchandise purchases 0 Advertising 0 Rent 0 Salaries 0 Commissions 0 Utilities 0 Equipment purchases 0 Dividends paid 0 Total cash disbursements 0 0 0 0 Excess (deficiency) of cash available over disbursements 0 0 0 0 Financing: Borrowings 0 Repayments 0 Interest 0 Total financing 0 0 0 0 Ending cash balance $0 $0 $0 $0

Answer 1

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Earrings Unlimited							Note
Sales Budget	February	March	April	May	June	April- Jun Qtr.
Sales (units)	26,600.00	40,600.00	65,600.00	100,600.00	50,600.00	216,800.00	A
Sell Price	13.00	13.00	13.00	13.00	13.00		B
Sales Budget	345,800.00	527,800.00	852,800.00	1,307,800.00	657,800.00	2,818,400.00	C=A*B
Collection Budget	February	March	April	May	June	April- Jun Qtr.
Sales Budget	345,800.00	527,800.00	852,800.00	1,307,800.00	657,800.00	2,818,400.00	See C
20% collected in same month			170,560.00	261,560.00	131,560.00	563,680.00	D= C*20%
70% collected in next month			369,460.00	596,960.00	915,460.00	1,881,880.00	E= 70% of C of previous month
10% collected in second month			34,580.00	52,780.00	85,280.00	172,640.00	F= 10% of C of previous to previous month
Expected cash collections			574,600.00	911,300.00	1,132,300.00	2,618,200.00	G=D+E+F

Purchase Budget	April	May	June	April- Jun Qtr.	July
Sales (units)	65,600.00	100,600.00	50,600.00	216,800.00	30,600.00	See A
Add: Desired Ending Inventory	40,240.00	20,240.00	12,240.00			H= 40% of A of next month
Total bracelet needed	105,840.00	120,840.00	62,840.00			I= A+H
Less: Expected Beginning Inventory	26,240.00	40,240.00	20,240.00			J= 40% of A
Bracelet Purchase Budget	79,600.00	80,600.00	42,600.00	202,800.00		K=I-J

Payment Budget	April	May	June	April- Jun Qtr.
Bracelet Purchase Budget	79,600.00	80,600.00	42,600.00	202,800.00	See K
Purchase price	4.30	4.30	4.30		L
Purchase cost	342,280.00	346,580.00	183,180.00	872,040.00	M=K*L
50% paid in same month	171,140.00	173,290.00	91,590.00	436,020.00	N= M*50%
50% paid in next month	103,000.00	171,140.00	173,290.00	447,430.00	O= 50% of M of previous month
Cash disbursements for merchandise purchases	274,140.00	344,430.00	264,880.00	883,450.00	P=N+O
Sales Commission Budget	April	May	June	April- Jun Qtr.
Sales Budget	852,800.00	1,307,800.00	657,800.00	2,818,400.00	See C
Sales Commission @ 4%	34,112.00	52,312.00	26,312.00	112,736.00	Q= C*4%
Cash budget	April	May	June	April- Jun Qtr.
Expected cash collections	574,600.00	911,300.00	1,132,300.00	2,618,200.00	See P
Total Cash Receipts	574,600.00	911,300.00	1,132,300.00
Estimated cash payments for
Merchandise purchases	274,140.00	344,430.00	264,880.00	883,450.00
Sales Commission	34,112.00	52,312.00	26,312.00	112,736.00
Advertising	230,000.00	230,000.00	230,000.00	690,000.00
Rent	21,000.00	21,000.00	21,000.00	63,000.00	ekkarill92 Next > < Previous Related Solutions Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been... Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a... Case 8-33 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been... 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