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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 preparation of the master budget for the first quarter:

a.

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

Debits Credits
  Cash $ 48,000
  Accounts receivable 216,000
  Inventory 57,000
  Buildings and equipment (net) 371,000
  Accounts payable $ 94,000
  Capital shares 480,000
  Retained earnings 118,000
$ 692,000 $ 692,000
b. Actual sales for December and budgeted sales for the next four months are as follows:
  
  December (actual) $ 270,000
  January 380,000
  February 580,000
  March 280,000
  April 180,000
c.

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.

d. The company’s gross margin is 40% of sales.
e.

Monthly expenses are budgeted as follows: salaries and wages, $28,000 per month; advertising, $64,000 per month; shipping, 5% of sales; depreciation, $15,000 per month; other expenses, 3% of sales.

f.

At the end of each month, inventory is to be on hand equal to 25% of the following month’s sales needs, stated at cost.

g.

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

h.

During February, the company will purchase a new copy machine for $1,000 cash. During March, other equipment will be purchased for cash at a cost of $80,000.

i. During January, the company will declare and pay $43,000 in cash dividends.
j.

The company must maintain a minimum cash balance of $31,000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of payment of principal. The annual interest rate is 12%. (Figure interest on whole months, e.g., 1/12, 2/12.)

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