Question

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Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The...

Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter:

  1. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

Cash $ 48,000
Accounts receivable 224,000
Inventory 60,000
Buildings and equipment (net) 370,000
Accounts payable $ 93,000
Common stock 500,000
Retained earnings 109,000
$ 702,000 $ 702,000
  1. Actual sales for December and budgeted sales for the next four months are as follows:

December(actual) $ 280,000
January $ 400,000
February $ 600,000
March $ 300,000
April $ 200,000
  1. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales.

  2. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

  3. Monthly expenses are budgeted as follows: salaries and wages, $27,000 per month: advertising, $70,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $42,000 for the quarter.

  4. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

  5. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month.

  6. During February, the company will purchase a new copy machine for $1,700 cash. During March, other equipment will be purchased for cash at a cost of $84,500.

  7. During January, the company will declare and pay $45,000 in cash dividends.

  8. Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local 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. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required:

Using the data above, complete the following statements and schedules for the first quarter:

1. Schedule of expected cash collections:

2-a. Merchandise purchases budget:

2-b. Schedule of expected cash disbursements for merchandise purchases:

3. Cash budget:

4. Prepare an absorption costing income statement for the quarter ending March 31.

5. Prepare a balance sheet as of March 31.

Solutions

Expert Solution

As per the given information Hillyard company, an office supplies speciality store, preparing
the master budget for the first quarter of the year.
1. Schedule of expected cash collections: 4.Income statement for the quarter ended March 31
Particulars January February March Particulars Amount ($)
Cash collected from Sales for 3 months 1300000
Collected from Cash sales 80000 120000 60000 Less :Cost of goods sold(60% of sales) 780000
Opening Acccounts receivbale 224000 Gross margin 520000
Collected from January credit sales 320000 Other expenses:
Collected from Feb credit sales 480000 Salaries and wages(27000*3) 81000
Advertisement expenses(70000*3) 210000
304000 440000 540000 shipping cost(5% of sales) 65000
Other expenses(3% of sales) 39000
Depreciation 42000
Interest expense(1% per month) 2400
2-a. Merchandise Purchases budget: Total other expenses 439400
Net profit 80600
Particulars January February March
Cost of goods sold (60% of sales) 240000 360000 180000 5.Balance sheet as on March 31
Closing inventory should be (25% of cost
of goods sold of next month) 90000 45000 30000 Assets
330000 405000 210000
Less: Opening inventory 60000 90000 45000 Cash 42900
Purchases during the month 270000 315000 165000 Accounts receivable 240000
Inventory 30000
2-b. Schedule of expected cash disbursements for merchandise purchases: Buildings and equipment net 414200
Particulars January February March Liabilities
Amount paid for opening accounts payable 93000 Accounts payable 82500
Cash paid for january month purchases 135000 135000 Common stock 500000
Cash paid for february month purchases 157500 157500 Retained earnings 109000
Cash paid for march month purchases 82500 Add: Profit during the year 80600
228000 292500 240000 189600
3. Cash Budget: Less: Dividends declared 45000
Net retained earnings 144600
Particulars January February March Total 727100 727100
Opeing cash balance 48000 30000 30800
Expected cash collections as per 1 304000 440000 540000
352000 470000 570800
Amount paid for purchases as per 2-b 228000 292500 240000
Expenses paid for other expenses
Salaries and wages 27000 27000 27000
Advertisement expenses 70000 70000 70000
shipping cost(5% of sales) 20000 30000 15000
Other expenses(3% of sales) 12000 18000 9000
Purchase of machine & euipment in cash 1700 84500
Payment of dividends 45000
Total cash disbursements 402000 439200 445500
Cash balance -50000 30800 125300

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