Question

Problem 7-27A Completing a Master Budget [LO7-2, LO7-4, LO7-7, LO7-8, LO7-9, LO7-10]

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods:

  

Current assets as of March 31:
Cash	$	8,000
Accounts receivable	$	20,000
Inventory	$	36,000
Building and equipment, net	$	120,000
Accounts payable	$	21,750
Capital stock	$	150,000
Retained earnings	$	12,250

  

a.	The gross margin is 25% of sales.
b.	Actual and budgeted sales data:

  

March (actual)	$50,000
April	$60,000
May	$72,000
June	$90,000
July	$48,000

  

c.	Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.
d.	Each month’s ending inventory should equal 80% of the following month’s budgeted cost of goods sold.
e.	One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.
f.	Monthly expenses are as follows: commissions, 12% of sales; rent, $2,500 per month; other expenses (excluding depreciation), 6% of sales. Assume that these expenses are paid monthly. Depreciation is $900 per month (includes depreciation on new assets).
g.	Equipment costing $1,500 will be purchased for cash in April.
h.	Management would like to maintain a minimum cash balance of at least $4,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

  

Required:
Using the data above:
1.	Complete the following schedule.

        

2.	Complete the following:

      

	Budgeted cost of goods sold for April = $60,000 sales × 75% = $45,000.
	Add desired ending inventory for April = $54,000 × 80% = $43,200.

       

3.	Complete the following cash budget: (Borrow and repay in increments of $1,000. Cash deficiency, repayments and interest should be indicated by a minus sign.)

     

4.	Prepare an absorption costing income statement for the quarter ended June 30.

        

5.	Prepare a balance sheet as of June 30.

     

Answer 1

Sales Budget	March	April	May	June	July
Cash Sales	30,000.00	36,000.00	43,200.00	54,000.00	28,800.00
Sales On Account	20,000.00	24,000.00	28,800.00	36,000.00	19,200.00
Total Budgeted Sales	50,000.00	60,000.00	72,000.00	90,000.00	48,000.00
Schedule of cash receipts	March	April	May	June	July
Current Cash Sales	30,000.00	36,000.00	43,200.00	54,000.00	28,800.00
Plus collections from A/R		20,000.00	24,000.00	28,800.00	36,000.00
Total Collections	30,000.00	56,000.00	67,200.00	82,800.00	64,800.00
Inventory Purchases Budget	March	April	May	June	July
Budgeted COGS	37,500.00	45,000.00	54,000.00	67,500.00	36,000.00
Plus: Deisred ending inventory	36,000.00	43,200.00	54,000.00	28,800.00
Inventory Needed	73,500.00	88,200.00	108,000.00	96,300.00	36,000.00
Less: Beginning Inventory	-	(36,000.00)	(43,200.00)	(54,000.00)	(28,800.00)
Required Purchases on account	73,500.00	52,200.00	64,800.00	42,300.00	7,200.00
Schedule of cash payment budget for inventory purchases	March	April	May	June	July
Payment of current month's account payable	36,750.00	26,100.00	32,400.00	21,150.00	3,600.00
Payment for prior month's account payable	-	36,750.00	26,100.00	32,400.00	21,150.00
Total budgeted payments for inventory	36,750.00	62,850.00	58,500.00	53,550.00	24,750.00
Selling and administrative expense budget	March	April	May	June	July
Sales commission	6,000.00	7,200.00	8,640.00	10,800.00	5,760.00
Rent	2,500.00	2,500.00	2,500.00	2,500.00	2,500.00
Other Expenses	3,000.00	3,600.00	4,320.00	5,400.00	2,880.00
Equipment Depreciation	-	900.00	900.00	900.00	900.00
Total Expenses	11,500.00	14,200.00	16,360.00	19,600.00	12,040.00