Question

Problem 8-31 Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10] Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter: As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances: Cash $ 60,000 Accounts receivable 216,000 Inventory 60,750 Buildings and equipment (net) 370,000 Accounts payable $ 91,125 Common stock 500,000 Retained earnings 115,625 $ 706,750 $ 706,750 Actual sales for December and budgeted sales for the next four months are as follows: December(actual) $ 270,000 January $ 405,000 February $ 602,000 March $ 317,000 April $ 213,000 Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) Monthly expenses are budgeted as follows: salaries and wages, $35,000 per month: advertising, $61,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,300 for the quarter. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold. One-half of a month’s inventory purchases is paid for in the month of purchase; the other half is paid in the following month. During February, the company will purchase a new copy machine for $3,000 cash. During March, other equipment will be purchased for cash at a cost of $80,000. During January, the company will declare and pay $45,000 in cash dividends. Management wants to maintain a minimum cash balance of $30,000. 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. 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, complete the following statements and schedules for the first quarter: 1. Schedule of expected cash collections: 2-a. Merchandise purchases budget: 2-b. Schedule of expected cash disbursements for merchandise purchases: 3. Cash budget: 4. Prepare an absorption costing income statement for the quarter ending March 31. 5. Prepare a balance sheet as of March 31.

Answer 1

Schedule of expected cash collections
	Jan	Feb	Mar
Cash Sales	81,000.00	120,400.00	63,400.00
Collections	216,000.00	324,000.00	481,600.00
Expected cash collections	297,000.00	444,400.00	545,000.00

Merchandise purchases budget
	Jan	Feb	Mar
Cost of Goods Sold	243,000.00	361,200.00	190,200.00
Ending inventory(25% of Next Month Sale)	90,300.00	47,550.00	31,950.00
Begning Inventory	60,750.00	90,300.00	47,550.00
Merchandise purchases*	213,450.00	403,950.00	205,800.00

Schedule of expected cash disbursements for Merchandise
	Jan	Feb	Mar
Payment in Month of Purchase(50%)	106,725.00	201,975.00	102,900.00
Payment in Lasst Month Purchase(50%)	91,125.00	106,725.00	201,975.00
Expected cash disbursements	197,850.00	308,700.00	304,875.00

Cash Budget
	Jan	Feb	Mar
Balance, 1 Jan	60,000.00	30,750.00	30,290.00
Cash Collections	297,000.00	444,400.00	545,000.00
Cash Available	357,000.00	475,150.00	575,290.00
Expected payments
Expected cash disbursements for Merchandise	197,850.00	308,700.00	304,875.00
Salaries and Wages	35,000.00	35,000.00	35,000.00
advertising	61,000.00	61,000.00	61,000.00
shipping	20,250.00	30,100.00	15,850.00
other expenses	12,150.00	18,060.00	9,510.00
copy machine		3,000.00
other equipment			80,000.00
Dividend	45,000.00
Repayment of Loan(45000*2%+11000*1%)			57,010.00
Total Expected payment	371,250.00	455,860.00	563,245.00
(Shortage)/Excess Cash	(14,250.00)	19,290.00	12,045.00
Loan from bank	45,000.00	11,000.00	-
Closing cash Balance	30,750.00	30,290.00	12,045.00

Income statement for the quarter ended March 31
Sales	1,324,000.00
Cost of Goods Sold	852,000.00
Gross Profit	472,000.00
Selling and Administrative Expenses	439,220.00
Interest Expesnes(45000*2%+11000*1%)	1,010.00
Net Income	31,770.00

Selling and Admin Expesnes
	Jan	Feb	Mar	Total
Salaries and Wages	35,000.00	35,000.00	35,000.00	105,000.00
advertising	61,000.00	61,000.00	61,000.00	183,000.00
shipping	20,250.00	30,100.00	15,850.00	66,200.00
other expenses	12,150.00	18,060.00	9,510.00	39,720.00
Depreciation				45,300.00
Total Selling and Admin Expesnes				439,220.00

Cost of Goods Sold
Beginning Stock	60,750.00
Purchases	823,200.00
Closing Stock	31,950.00
Cost of Goods Sold	852,000.00

Balance Sheet as at Mar 31
Assets
Cash	12,045.00
Accounts receivable	253,600.00
Inventory	31,950.00
Plant and equipment, net of depreciation	407,700.00
Total assets	705,295.00
Liabilities and Stockholders’ Equity
Accounts payable	102,900.00
Common stock	500,000.00
Retained earnings	102,395.00
Total liabilities and stockholders’ equity	705,295.00

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