Question

Assets:

Cash- 36,000

A/R- 525,000

Inventory- 150,000

Total Current Assets- 711,000

Equipment- 540,000

Less: Accumulated Depreciation- 67,500

Equipment, net- 472,500

Total Assets- 1,183,500

Liabilities and Equity:

A/P- 360,000

Bank Loan payable- 15,000

Taxes Payable- 90,000

Total Liabilities- 465,000

Common Stock- 472,500

Retained Earnings- 246,000

Total Stockholders Equity- 718,500

Total Liabilties and Equity- 1,183,500

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

a. The company’s single product is purchased for $30 per unit and resold for $55 per unit. The expected inventory level of 5,000 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, 10,000 units.

b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $125,000 is collected in January and the remaining $400,000 is collected in February.

c. 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, $80,000 is paid in January and the remaining $280,000 is paid in February.

d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $60,000 per year.

e. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,000 per month and is paid in cash.

f. 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, $96,000; and March, $28,800. 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.

g. 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.

h. 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 $25,000 at the end of each month.

i. The income tax rate for the company is 40%. 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

(a) Sales Budget
	January	February	March	Total
Budgeted unit sales	7000	9000	11000	27000
Unit sale price $	55	55	55	55
Budgeted Sales	385000	495000	605000	1485000
Cash Sales	96250	123750	151250	371250
Credit Sales	288750	371250	453750	1113750
(b)   Schedule of cash receipts
	January	February	March	Total
Collections from
Receivables on December 31	125000	400000		525000
January Sales	96250	173250	115500	385000
February Sales		123750	222750	346500
March Sales			151250	151250
Total Collections	221250	697000	489500	1407750
Receivables	688750	486750	602250	602250
(c) Inventory Purchase Budget
	January	February	March	Total
Budgeted unit sales	7000	9000	11000	27000
Add: Desired ending inventory	1800	2200	2000	2000
(50% of next month's sales)
Total goods neded	8800	11200	13000	29000
Less: Beginning inventory	5000	1800	2200	5000
Budgeted purchase of inventory (units)	3800	9400	10800	24000
Cost per unit    - $	30	30	30	30
Budgeted purchase of inventory (dollars)	114000	282000	324000	720000
(d) Cash payment budget for purchases
	January	February	March	Total
Budgeted Purchases	114000	282000	324000	720000
Payments:
Payables on December 31	80000	280000		360000
January purchases		22800	91200	114000
February purchases			56400	56400
Total payments	80000	302800	147600	530400
Accounts Payable	394000	373200	549600	549600
(e) Operating expenses budget
	January	February	March	Total
Sales Commossion (20% of sales)	77000	99000	121000	297000
Sales Salaries	5000	5000	5000	15000
General and Admn.salaries	12000	12000	12000	36000
Maintenance expenses	2000	2000	2000	6000
Total operating expenses	96000	118000	140000	354000
Cash Budget
For the Quarter Ending March 31, 2018
	January	February	March	Total
Beginning Balance	36000	45250	225450	36000
Add: Cash receipts	221250	697000	489500	1407750
Cash available for disbursements	257250	742250	714950	1443750
Less: Payments
for purchase of inventory	80000	302800	147600	530400
For operating espenses	96000	118000	140000	354000
for purchase of land			150000	150000
for purchase of equipment	36000	96000	28800	160800
For income tax			90000	90000
Total payments	212000	516800	556400	1285200
Receipts minus payments	45250	225450	158550	158550
Minimum cash balance	25000	25000	25000	25000
Excess / (Shortage)	20250	200450	133550	133550
Financing activitiy
Borrowing / (Repayments)				0
Repayments				0
Total Financing	0	0	0	0
Ending cash balance	45250	225450	158550	158550
Income Statement
For the quarter ending March 31, 2018
Sales Revenue		1485000
Cost of goods sold		810000
Gross Profit		675000
Operating Expenses
Sales Commossion (20% of sales)	297000
Sales Salaries	15000
General and Admn.salaries	36000
Maintenance expenses	6000
Depreciation	9050
Total operating expenses		363050
Incmoe before taxes		311950
Income Tax (34%)		106063
Net Income		205887
Budgeted Balance sheet
as at March 31, 2018
Assets
Cash		158550
Accounts Receivable		602250
Inventory		60000
Property and equipment , net
Land		150000
Equipment, Cost	540000
Add: Purchases	160800
	700800
Less: Depreciation	76550	624250
Total Assets		1595050
Liabilities and owners' equity
Accounts Payable		549600
Bank Loan		15000
Income Tax Payable		106063
Total liabilities		670663
Common Stock		472500
Retained earnings
Balance as at January 1	246000
Net income	205887	451887
Total Liabilities and equity		1595050	0