Question

Near the end of 2017, the management of DJS Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017. DJS SPORTS CO. Estimated Balance Sheet December 31, 2017 Assets Liabilities and Equity Cash 36,000 Accounts Payable $ 360,000 Accounts Receivable 525,000 Bank Loan Payable 15,000 Inventory 150,000 Taxes Payable (due 3/15/17) 90,000 Total Current Assets $ 711,000 Total Liabilities $ 465,000 Equipment 540,000 Common Stock 472,500 Less: Accum Depreciation (67,500) Retained Earnings 246,000 Net Equipment 472,500 Total Stockholder's Equity 718,500 Total Assets $ 1,183,500 Total Liabilities and Equity 1,183,500 To prepare a master budget for January, February, and March of 2018, management gathers the following information.

a. DJS Sport's single product is purchased for $25 per unit and resold for $50 per unit. The expected inventory level of 6,000 units on December 31, 2017, is more than management's desired level for 2018, which is 20% of the next month's expected sales (in units). Expected sales are: January, 8,000 units; February, 9,000 units; March, 10,000 units; and April, 11,000 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 acquire 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. DJS Sports 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 in 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 (show supporting calculations as needed, and round amounts to the nearest dollar): 1. Monthly sales budgets (showing both budgeted unit sales and dollar sales). 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

1a.DJS Sports Co.

Monthly Sales Budget

January, February, March, 2018

	January	February	March
Budgeted Unit Sales	8,000	9,000	10,000
Unit Selling Price	$ 50	$ 50	$ 50
Budgeted Dollar Sales	$ 400,000	$ 450,000	$ 500,000

1b. Schedule of Expected Cash Collections from Sales:

	January	February	March
	$	$	$
Cash Sales ( 25%)	100,000	112,500	125,000
Collection of
Accounts Receivable	125,000	400,000
January Credit Sales		180,000	120,000
February Credit Sales			202,500
Total Expected Cash Collections	225,000	692,500	447,500

2a. Monthly Merchandise Purchases Budget:

	January	February	March
Cost of Goods Sold	$ 200,000	$ 225,000	$ 250,000
Desired Ending Inventory	45,000	50,000	55,000
Total Cost of Inventory Needed	245,000	275,000	305,000
Less: Beginning Inventory	150,000	45,000	50,000
Budgeted Materials Purchases	$ 95,000	$ 230,000	$ 255,000

2b. Schedule of Expected Disbursements for Merchandise Purchases:

	January	February	March
	$	$	$
Accounts Payable: December 31, 2017	80,000	280,000
Purchases : Jan 2018		19,000	76,000
Purchases: Feb 2018			46,000
Expected Cash Disbursements	$ 80,000	$ 299,000	$ 122,000

3. Monthly Selling Expense Budget:

	January	February	March
	$	$	$
Sales Commissions	80,000	90,000	100,000
Sales Salaries	5,000	5,000	5,000
Budgeted Monthly Selling Expenses	85,000	95,000	105,000

4. Monthly General and Administrative Expense Budget:

	January	February	March
	$	$	$
Maintenance Expenses	2,000	2,000	2,000
General and Administrative Salaries	12,000	12,000	12,000
Budgeted Monthly General and Administrative Expenses	14,000	14,000	14,000

5. Monthly Capital Expenditure Budget:

	January	February	March
	$	$	$
Purchase of Land	0	0	150,000
Purchase of Equipment	36,000	96,000	28,800
Budgeted Capital Expenditures	36,000	96,000	178,800

6. DJS Sports Co.

Cash Budget

January, February, March, 2018

	January	February	March
	$	$	$
Beginning Cash Available	36,000	30,850	219,350
Add: Cash Receipts	225,000	692,500	447,500
Total Cash Available	261,000	723,350	666,850
Less: Disbursements for
Merchandise Purchases	80,000	299,000	122,000
Selling Expenses	85,000	95,000	105,000
General and Administrative Expenses	14,000	14,000	14,000
Capital Expenditures	36,000	96,000	178,800
Income Taxes	0	0	90,000
Interes on Bank Loan	150	0	0
Total Cash Disbursements	215,150	504,000	509,800
Cash Surplus ( Deficit)	45,850	219,350	157,050
Financing
Borrowing	0	0	0
Repayment	(15,000)	0	0
Total Financing	(15,000)	0	0
Ending Cash Balance	30,850	219,350	157,050