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,
2017Assets
Cash$35,000
Accounts receivable 520,000
Inventory 150,000
Total current assets $705,000
Equipment 552,000
Less: accumulated depreciation
69,000
Equipment, net 483,000
Total assets $1,188,000
Liabilities and
Equity
Accounts payable$360,000
Bank loan payable 14,000
Taxes payable (due 3/15/2018) 89,000
Total
liabilities $463,000
Common stock 475,000
Retained earnings 250,000
Total stockholders’
equity 725,000
Total liabilities and equity $1,188,000
o 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 $52 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, 6,750 units; February, 9,000 units;
March, 10,750 units; and April, 9,500 units.
- Cash sales and credit sales represent 25% and 75%,
respectively, of total sales. Of the credit sales, 61% is collected
in the first month after the month of sale and 39% 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.
- 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, $70,000 is paid in January and the remaining $290,000 is
paid in February.
- Sales commissions equal to 20% of sales are paid each month.
Sales salaries (excluding commissions) are $78,000 per year.
- General and administrative salaries are $156,000 per year.
Maintenance expense equals $1,900 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, $31,200; February, $103,200; and March, $24,000.
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
$175,000, 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 $40,810 at the end of each month.
- The income tax rate for the company is 39%. 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.