Question

ear 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		95,000
Total current assets				$	650,500
Equipment		636,000
Less: accumulated depreciation		79,500
Equipment, net					556,500
Total assets				$	1,207,000
Liabilities and Equity
Accounts payable	$	375,000
Bank loan payable		15,000
Taxes payable (due 3/15/2018)		90,000
Total liabilities				$	480,000
Common stock		470,500
Retained earnings		256,500
Total stockholders’ equity					727,000
Total liabilities and equity				$	1,207,000

To prepare a master budget for January, February, and March of 2018, management gathers the following information.

The company’s single product is purchased for $20 per unit and resold for $57 per unit. The expected inventory level of 4,750 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, 11,000 units; and April, 11,000 units.

Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 63% is collected in the first month after the month of sale and 37% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $130,000 is collected in January and the remaining $390,000 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 $305,000 is paid in February.

Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $54,000 per year.

General and administrative salaries are $132,000 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, $38,400; February, $96,000; and March, $26,400. 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 $150,000, 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 $44,500 at the end of each month.

The income tax rate for the company is 37%. 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.

Answer 1

Requirement 1
	Monthly Sales Budget
		January	February	March	Totals
	Sales in units	7000	9000	11000	27000
	Selling Price per unit	57	57	57	57
	Sales Revenue	399000	513000	627000	1539000
Requirement 2
	Purchases Budget	January	February	March	Totals
	Sales In units	7000	9000	11000	27000
	Desired Ending Inventory	1800	2200	2200	2200
	Total Needs	8800	11200	13200	29200
	Beginning Inventory	4750	1800	2200	4750
	Total Purchases in units	4050	9400	11000	24450
	Purchase price per unit	20	20	20	20
	Total purchase value in $	81000	188000	220000	489000
Requirement 3
	Selling Expenses Budget
		January	February	March	Totals
	Sales commissions	79800	102600	125400	307800
	Sales Salaries	4500	4500	4500	13500
	Total selling expense budget	84300	107100	129900	321300
Requirement 4
	General and administrative expense budget
		January	February	March	Totals
	General and administrative salaries	11000	11000	11000	33000
	Maintenace expense	1900	1900	1900	5700
	Total General and administrative expenses	12900	12900	12900	38700
Requirement 5
	Capital expenditure budget
		January	February	March	Totals
	New equipment to be purchased	38400	96000	26400	160800
	Land to be purchased			150000	150000
	Total capital expenditure budget	38400	96000	176400	310800
Requirement 6
	Cash Budget	January	February	March	Totals
	Cash Receipts	229750	706777.5	509865
	Cash Disbursements	205600	537200	511600
	Excess/(Deficiency)	24150	169577.5	-1735
	of Cash
	Beginning Balance	35500	44500	214077.5
	Projected Ending Balance	59650	214077.5	212342.5
	Borrowing/(Repayments) on Line of Credit	-15000	0	0
	Interest	-150	0	0
	Ending Cash Balance	44500	214077.5	212342.5
	Cash Receipts Budget	January	February	March	Totals
	Cash Sales	99750	128250	156750	384750
	Cash Collections:
	Current Month
	1 Month Prior		188527.5	242392.5	430920
	2 Months Prior	130000	390000	110722.5	630722.5
	Total Collections	229750	706777.5	509865	1446392.5
	Cash Disbursements	January	February	March	Totals
	Purchases
	Payments for Purchases:				0
	Current Month
	1 Month Prior		16200	37600	53800
	2 Month Prior	70000	305000	64800	439800
	Total Payment to be made for purchases	70000	321200	102400	493600
	Selling expenses	84300	107100	129900	321300
	General and administrative expense	12900	12900	12900	38700
	Income Taxes			90000	90000
	Capital expenditure	38400	96000	176400	310800
	Total Disbursements	205600	537200	511600	1254400
Requirement 7
	Budgeted Income Statement	January	February	March	Totals
	Sales	399000	513000	627000	1539000
	Variable Costs:
	Cost of Goods Sold	140000	180000	220000	540000
	Gross profit	259000	333000	407000	999000
	Expenses
	Selling expenses	84300	107100	129900	321300
	General and administrative expense	12900	12900	12900	38700
	Depreciation	7025	8025	8300	23350
	Total Expenses	104225	128025	151100	383350
	Income Before Interest & Tax	154775	204975	255900	615650
	Interest Expense	-150	0	0	-150
	Income Before Tax	154625	204975	255900	615500
	Tax Expense	57211.25	75840.75	94683	227735
	Net Income	97413.75	129134.25	161217	387765
Requirement 8
	Balance Sheet as of March 31, 2018
	Assets			Liabilities and Equity
	Cash		212342.5	Accounts Payable	370400
	Accounts Receivable		612607.5
	Inventory		44000	Taxes Payable	227735
	Land		150000
	Equipment	796800		Common Stock	470500
	Less : Accumulated Depreciation	102850	693950	Retained Earnings	644265
	Total Assets		1712900	Total Liabilities & Equity	1712900