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 $ 35,500 Accounts receivable 520,000 Inventory 157,500 Total current assets $ 713,000 Equipment 576,000 Less: accumulated depreciation 72,000 Equipment, net 504,000 Total assets $ 1,217,000 Liabilities and Equity Accounts payable $ 370,000 Bank loan payable 14,000 Taxes payable (due 3/15/2018) 89,000 Total liabilities $ 473,000 Common stock 474,000 Retained earnings 270,000 Total stockholders’ equity 744,000 Total liabilities and equity $ 1,217,000 To prepare a master budget for January, February, and March of 2018, management gathers the following information. a. The company’s single product is purchased for $30 per unit and resold for $57 per unit. The expected inventory level of 5,250 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, 11,500 units; and April, 10,500 units. b. Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 59% is collected in the first month after the month of sale and 41% 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. c. 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, $60,000 is paid in January and the remaining $310,000 is paid in February. d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $72,000 per year. e. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,100 per month and is paid in cash. f. 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, $33,600; February, $96,000; 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. g. The company plans to buy land at the end of March at a cost of $145,000, which will be paid with cash on the last day of the month. h. 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 $28,000 at the end of each month. i. The income tax rate for the company is 41%. 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. 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.

Answer 1

1a. Sales Budget:

	January	February	March	Quarter
Budgeted Unit Sales	7,000	9,000	11,500	27,500
Unit Selling Price	$ 57	$ 57	$ 57	$ 57
Budgeted Sales Revenue	$ 399,000	$ 513,000	$ 655,500	$ 1,567,500

1b. Schedule of Cash Collections from Sales:

	January	February	March	Quarter
Cash Sales	$ 79,800	$ 102,600	$ 131,100	$ 313,500
Collection of
Accounts Receivable, Dec 31	125,000	395,000		520,000
January Credit Sales		188,328	130,872	319,200
February Credit Sales			242,136	242,136
Totals	$ 204,800	$ 685,928	$ 504,108	$ 1,394,836

2.a. Merchandise Purchases Budget:

	January	February	March	Quarter	April
Budgeted Sales in Units	7,000	9,000	11,500	27,500	10,500
Add: Desired Ending Inventory	1,800	2,300	2,100	2,100
To Inventory Needs	8,800	11,300	13,600	29,600
Less: Beginning Inventory	5,250	1,800	2,300	5,250
Purchases required in Units	3,550	9,500	11,300	24,350
Cost per unit	$ 30	$ 30	$ 30	$ 30
Budgeted Cost of Purchases	$ 106,500	$ 285,000	$ 339,000	$ 730,500

2.b. Schedule of Cash Disbursements for Merchandise Purchases:

	January	February	March	Quarter
Disbursements of
Accounts Payable, Dec 31	$ 60,000	$ 310,000		$ 370,000
January Purchases		21,300	85,200	106,500
February Purchases			57,000	57,000
Totals	$ 60,000	$ 331,300	$ 142,200	$ 533,500

3.

Dimsdale Sports Co. Cash Budget For the quarter ended March 31, 2018
Beginning Cash Balance	35,500	32,660	168,588	35,500
Add: Cash Receipts	204,800	685,928	504,108	1,394,836
Total Cash Available	240,300	718,588	672,696	1,430,336
Less: Cash Disbursements for
Merchandise Purchases	60,000	331,300	142,200	533,500
Sales Commission Expense	79,800	102,600	131,100	313,500
Sales Salaries Expense	6,000	6,000	6,000	18,000
General and Administrative Salaries	12,000	12,000	12,000	36,000
Maintenance Expense	2,100	2,100	2,100	6,300
Equipment Purchases	33,600	96,000	24,000	153,600
Purchase of Land	0	0	145,000	145,000
Income Taxes	0	0	89,000	89,000
Interest Expense	140	0	0	140
Total Cash Disbursements	193,640	550,000	551,400	1,295,040
Cash Surplus ( Deficit)	46,660	168,588	121,296	135,296
Financing
Borrowing	0	0	0	0
Repayment	(14,000)	0	0	(14,000)
Total Financing	(14,000)	0	0
Ending Cash Balance	32,660	168,588	121,296	121,296

4.

Dimsdale Sports Company Income Statement For the quarter ended March 31, 2018
	$	$
Sales Revenue		1,567,500
Less: Cost of Goods Sold		825,000
Gross Profit		742,500
Selling and Administrative Expenses
Sales Commission Expense	313,500
Sales Salaries Expense	18,000
General and Administrative Salaries Expense	36,000
Maintenance Expense	6,300
Depreciation Expense	21,300
Total Selling and Administrative Expenses		395,100
Income from Operations		347,400
Interest Expense		140
Taxable Income		347,260
Income Tax Expense ( 41 % )		142,377
Net Income		204,883