Question

The company’s projected balance sheet as of December 31, 2010 is provided below:

Cash​​​​​ USD 35,000

Accounts receivable​​​ USD 270,000

Marketable securities​ ​​USD 15,000

Inventory ​​ ​​USD 154,000

Net PPE​​​​ USD 626,000​

Total assets​​​​ USD 1,100,000

Accounts payable​​​ USD 176,400

Bond interest payable​​​ USD 12,500

Property tax payable​​​ USD 3,600

Bonds payable (10% due in 2016). ​USD 300,000

Common stock​​​​ USD 500,000

Retained earnings​​​ USD 107,500

Total liabilities and equity​​ USD 1,100,000

Now the company is preparing budgets for first quarter of 2011. The following additional information is provided:

1. Projected sales for December 2010 are USD 400,000. Credit sales are typically 75% of total sales. Sun credit experience shows that 10% of credit sales are collected during the month of sales, and remainder is collected in the following month. Sales are expected to increase by 10% each month over the previous month’s sales.

2. COGS is 70% of sales. Inventory is purchased on account and 40% of each month’s purchases are paid during the month of purchase. The remainder – in the following month. In order to have adequate stock, at the end of the month the level of inventory has to be half of month’s projected COGS.

3. The company has estimated other expenses:

a. Sales salary​​ USD 21,000

b. Advertising and promotion ​USD 16,600

c. Administrative salaries​​ USD 21,000

d. Depreciation​​​ USD 25,000

e. Interest on bonds​​ USD 2,500

f. Property taxes​​​ USD 900

g. In addition sales commission is 1% of sales.

4. The company also plans to purchase equipment for 125,000. The purchase will be financed from company’s cash and marketable securities. If necessary the company may obtain the loan to finance the purchase. The minimum period is 10 month and interest rate is 10% p.a. If loan is necessary the company plans to repay it at the end of the first quarter.

5. The shareholders demanding to pay them dividends of USD 50,000 at the end of each quarter.

6. The interest on short-term loan of quarter will be paid at the loan repayment. The interest on the company’s bond is paid semiannually on January 31 and July 31 for the preceding six-month period.

7. Property taxes are paid semiannually on February 28 and August 31 for preceding six month period.

Required:

Prepare Sun Company’s master budget for first quarter of 2011 by comleting sales budget, cash receipts budget, purchases budget, cash disbursement budget

Prepare budgeted income statement for 1 quarter of 2011

Prepare budgeted balance sheet as of March 31, 2011

Answer 1

1. Cash Budget:

Particulars	Jan 2011	Feb 2011	Mar 2011
Cash Sales	110,000	121,000	133,100
Credit Sales - 10%	33,000	36,300	39,930
Credit Sales - 90%	270,000	297,000	326,700
Less: Cash Payments
Cash Purchases - 40%	132,000	145,200	159,720
Credit Purchases - 60%	180,000	198,000	217,800
Net	101,000	111,100	122,210

Note:

Purchases Budget & Cash Disbursement Budget:

COGS = Beginning Inventory + Purchases - Ending Inventory

Purchases = COGS + Ending Inventory - Beginning Inventory

Particulars	Dec	Jan	Feb	Mar
Sales	400,000	440,000	484,000	532,400
COGS @ 70% of sales	280,000	308,000	338,800	372,680
+ Ending Inventory @ 50% of next month sales	220,000	242,000	266,200	292,820
- Beginning Inventory	200,000	220,000	242,000	266,200
Purchases	300,000	330,000	363,000	399,300
Cash Purchases @ 40%	120,000	132,000	145,200	159,720
Credit Purchase @ 60%	180,000	198,000	217,800	239,580

2. Budgeted Income Statement:

Particulars	$	$
Revenue		1,456,400
Less: Expenses
Cost of Goods Sold @ 70%	1,019,480
Sales Salary (21,000*3)	63,000
Advertising & Promotion (16,600*3)	49,800
Administrative Salaries (21,000*3)	63,000
Interest on bonds (2,500*3)	7,500
Property Taxes (900/2)	450
Sales Commission	14,564
Depreciation (25,000/4)	6,250
Interest on Short Term Loan	-
Total Expenses		1,224,044
Net Income		232,356
Less: Dividends		50,000
Retained Earnings		182,356