Question

      The Gessing Tire Company manufactures racing tires for bicycles. Gessing sells tires for $85 each. Gessing is planning for the next year by developing a master budget by quarters. Gessing’s balance sheet for December 31, 2018, follows:

Gessing Tire Company

Balance sheet

December 31, 2018

                Current Assets:

Cash                 $    52,000

Accounts Receivable         35,000

Raw Materials Inventory      1,900

Finished Goods Inventory     2,400

                         ________

Total Current Assets                 $    91,300

Property, Plant, and Equipment:

Equipment                    142,000

Less: Accumulated Depreciation   (50,000)   92,000

                           _________   ________

Total Assets                           $    183,300

                                    ==============

Liabilities

                   Current Liabilities:

                   Accounts Payable                   $10,000

                   

                               Stockholder’s Equity

                 Common Stock, no par       $     110,000

                 Retained Earnings                  63,300

                                                _________

                 Total Stockholders’ Equity                   173,300

                                                          _______

                 Total Liabilities and Stockholder’s Equity      $ 183,300

                                                         ========

Other data for Gessing Tire Company:

1. Budgeted sales are 1,000 tires for the first quarter and expected to increase by 100 tires per quarter. Cash sales are expected to be 20% of total sales, with the remaining 80% of sales on account.
2. Finished Goods Inventory on December 31, 2018 consists of 100 tires at $24 each.
3. Desired ending Finished Goods Inventory is 50% of the next quarter's sales; first quarter sales for 2020 are expected be 1,400 tires. FIFO inventory costing method is used.
4. Raw Materials Inventory on December 31, 2018, consists of 200 pounds of rubber compound used to manufacture the tires.
5. Direct materials requirements are 2 pounds of a rubber compound per tire. The cost of the compound is $9.50 per pound.
6. Desired ending Raw Materials Inventory is 10% of the next quarter's direct materials needed for production; desired ending inventory for December 31, 2019 is 200 pounds; indirect materials are insignificant and not considered for budgeting purposes.
7. Each tire requires 0.60 hours of direct labor; direct labor costs average $16 per hour.
8. Variable manufacturing overhead is $2 per tire.
9. Fixed manufacturing overhead includes $3,500 per quarter in depreciation and $28,220 per quarter for other costs, such as utilities, insurance, and property taxes.
10. Fixed selling and administrative expenses include $8,000 per quarter for salaries; $5,700 per quarter for rent; $1,650 per quarter for insurance; and $1,000 per quarter for depreciation.
11. Variable selling and administrative expenses include supplies at 1% of sales.
12. Capital expenditures include $35,000 for new manufacturing equipment, to be purchased and paid in the first quarter.
13. Cash receipts for sales on account are 80% in the quarter of sale and 20% in the quarter following the sale; December 31, 2018, Accounts receivable is received in the first quarter of 2019, uncollectible accounts are considered insignificant not considered for budgeting purposes.
14. Direct materials purchases are paid 80% in the quarter of the sale and 20% in the following quarter; December 31, 2018, Accounts payable is paid in the first quarter of 2019.
15. Direct labor, manufacturing overhead, and selling and administrative costs are paid in the quarter incurred.
16. Income tax expense is projected at $3,000 per quarter and is paid in the quarter incurred.
17. Gessing desires to maintain a minimum cash balance of $50,000 and borrows from the local bank as needed in increments of $1,000 at the beginning of the quarter ; principal repayments are made at the beginning of the quarter when excess funds are available and in increments of $1,000; interest is 6% per year and paid at the beginning of the quarter based on the amount outstanding from the previous quarter.

Read the requirments:

1. Prepare Gessing's operating budget and cash budget for 2019 by quarter. Required schedules and budgets include: sales​ budget, production​ budget, direct materials​ budget, direct labor​ budget, manufacturing overhead​ budget, cost of goods sold​ budget, selling and administrative expense​ budget, schedule of cash​ receipts, schedule of cash​ payments, and cash budget. Manufacturing overhead costs are allocated based on direct labor hours. Round all calculations to the nearest dollar.
2. Prepare Gessing's annual financial budget for 2019, including budgeted income statement and budgeted balance sheet.

Tire Company

                      Budgeted income statement

                     For the year ended december 31, 2019

Sales revenue

Cost of goods sold

Gross profit

Selling and administrative expenses

Operating income

Interest expense

Income before income taxes

Income tax expense

Net income

                  

             December 31, 2019

Current Assets:

Cash

Accounts Receivable

Raw Materials Inventory

Finished Goods inventory

Total Current assets

Property, plant and equipment:

Equipment

Less: Accumulated Depreciation

Total Assets

Liabilities

Current liabilities:

Accounts Payable

               Stockholders’ Equity

Common stock, no par

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

Answer 1