Question

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017
Assets
Cash	$	35,500
Accounts receivable		520,000
Inventory		105,000
Total current assets				$	660,500
Equipment		612,000
Less: accumulated depreciation		76,500
Equipment, net					535,500
Total assets				$	1,196,000
Liabilities and Equity
Accounts payable	$	375,000
Bank loan payable		16,000
Taxes payable (due 3/15/2018)		89,000
Total liabilities				$	480,000
Common stock		471,000
Retained earnings		245,000
Total stockholders’ equity					716,000
Total liabilities and equity				$	1,196,000

The company’s single product is purchased for $20 per unit and resold for $54 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, 7,250 units; February, 8,500 units; March, 11,000 units; and April, 9,500 units. Cash sales and credit sales represent 20% and 80%, 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, $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, $85,000 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 $66,000 per year. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,200 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, $36,000; February, $91,200; and March, $19,200. 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 $8,640 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.

Answer 1

1)

SALES BUDGET FOR THREE MONTH ENDING MARCH 2018
	JAN	FEB	MAR	Total
Unit sales [a]	7250	8500	11000
Unit selling price [b]	54	54	54
Total sales [a*b]	391500	459000	594000	1444500

2)

PURCHASE BUDGET FOR THREE MONTH ENDING MARCH 2018
	JAN	FEB	MAR	TOTAL
Expected units sales	7250	8500	11000	26750
Desired ending inventory	8500*20%=1700	11000*20%=2200	9500*20%= 1900	5800
Total required units	8950	10700	12900	32550
Less:Beginning inventory	-5250	-1700	-2200	-9150
Units to be purchased	3700	9000	10700	23400
Purchase cost per unit	20	20	20	20
Total Purchase cost	3700*20= 74000	180000	214000	468000

3)

SELLING EXPENSE BUDGET FOR THREE MONTH ENDING MARCH 2018
	Jan	Feb	Mar	Total
Sales commissions	391500*20%=78300	459000*20%=91800	594000 *20%=118800	288900
Sales salaries	66000/12=5500	5500	5500	16500
Total selling expense	83800	97300	124300	305400

4)

GENERAL AND ADMINISTRATIVE EXPENSE
	JAN	FEB	MAR	TOTAL
Salaries (144000/12= 12000per month)	12000	12000	12000	36000
Maintenance expense	2200	2200	2200	6600
Depreciation expense on equipment	6375	6375	6375	19125
Total GENERAL AND ADMINISTRATIVE EXPENSE	20575	20575	20575	61725
Less:Depreciation	-6375	-6375	-6375	-19125
Total cash expense for GENERAL AND ADMINISTRATIVE EXPENSE	14200	14200	14200	42600

**Depreciation =[cost -salvage value ]/useful life

         =[612000-0]/8

            = 76500

Depreciation per month = 76500/12 = 6375