Question

Near the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017.

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017
Assets
Cash	$	36,500
Accounts receivable		520,000
Inventory		142,500
Total current assets				$	699,000
Equipment		564,000
Less: accumulated depreciation		70,500
Equipment, net					493,500
Total assets				$	1,192,500
Liabilities and Equity
Accounts payable	$	355,000
Bank loan payable		15,000
Taxes payable (due 3/15/2018)		89,000
Total liabilities				$	459,000
Common stock		474,000
Retained earnings		259,500
Total stockholders’ equity					733,500
Total liabilities and equity				$	1,192,500

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

The company’s single product is purchased for $30 per unit and resold for $56 per unit. The expected inventory level of 4,750 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, 9,500 units; March, 11,250 units; and April, 11,000 units.

Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 59% is collected in the first month after the month of sale and 41% 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, $70,000 is paid in January and the remaining $285,000 is paid in February.

Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $84,000 per year.

General and administrative salaries are $144,000 per year. Maintenance expense equals $2,000 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, $21,600. 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 $170,000, 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 $24,000 at the end of each month.

The income tax rate for the company is 41%. 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 Sales - units	7250	9500	11250	28000
Selling Price per unit	56	56	56	56
Budgeted Sales	406000	532000	630000	1568000
Cash Sales - 20%	81200	106400	126000	313600
Credit Sales -- 80%	324800	425600	504000	1254400
(b)   Schedule of cash receipts
	January	February	March	Total
Cash Sales	81200	106400	126000	313600
Credit Sales
Receivables on Dec.31	130000	390000		520000
January Sales		191632	133168	324800
February Sales			251104	251104
Total Collections	211200	688032	510272	1409504
Receivables	714800	558768	678496	678496
(c) Inventory Purchase Budget
	January	February	March	Total
Budgeted sales units	7250	9500	11250	28000
Add: Desired ending inventory	1900	2250	2200	2200
(20% of next month's cost)
Total goods neded	9150	11750	13450	30200
Less: Beginning inventory	4750	1900	2250	4750
Budgeted purchase units	4400	9850	11200	25450
Cost per unit of inventory ($)	30	30	30	30
Total cost of purchases	132000	295500	336000	763500
(d) Cash payment budget for purchases
	January	February	March	Total
Budgeted Purchases	132000	295500	336000	763500
Payments:
Payables as on Dec.31	70000	285000		355000
January purchases		26400	105600	132000
February purchases			59100	59100
Total payments	70000	311400	164700	546100
Accounts Payable	417000	401100	572400	572400
(e) Selling expenses budget
	January	February	March	Total
Sales commission(20% of sales)	81200	106400	126000	313600
Sales Salaries	7000	7000	7000	21000
Total Selling Expenses	88200	113400	133000	334600
General and administration expenses budget
	January	February	March	Total
Salaries	12000	12000	12000	36000
Maintenance expenses	2000	2000	2000	6000
Total general and administration expenses	14000	14000	14000	42000
Capital expenditure budget
	January	February	March	Total
Equipment purchases	36000	91200	21600	148800
DIMSDALE SPORTS COMPANY
Cash Budget
	January	February	March	Total
Beginning Balance	36500	39500	197532	36500
Add: Cash receipts	211200	688032	510272	1409504
Cash available for disbursements	247700	727532	707804	1446004
Less: Payments
for purchase of inventory	70000	311400	164700	546100
for selling expenses	88200	113400	133000	334600
for general and admin. Expenses	14000	14000	14000	42000
for capital expenditure	36000	91200	21600	148800
for land			170000	170000
for income tax			89000	89000
Total payments	208200	530000	592300	1330500
Receipts minus payments	39500	197532	115504	115504
Minimum cash balance	24000	24000	24000	24000
Excess / (Shortage)	15500	173532	91504	91504
Financing activitiy
Borrowing / (Repayments)	0	0		0
Repayments			0	0
Total Financing	0	0	0	0
Ending cash balance	39500	197532	115504	115504
DIMSDALE SPORTS COMPANY
Contribution margin income statement
For the quarter ending March 31
Sales Revenue		1568000
Cost of goods sold		840000
Gross profit		728000
Selling, Gen. And Admn. Expenses
Selling expenses		334600
Gen. And administration expenses		42000
Depreciation Expense		20875
Total SG & A expenses		397475
Net income before taxes		330525
Income teax expense (41%)		135515
Net inome		195010
DIMSDALE SPORTS COMPANY
Budgeted Balance sheet
as at March 31
Assets
Cash		115504
Accounts Receivable		678496
Inventory		66000
Property and equipment , net
Land		170000
Beginning balance, net	564000
Add: Purchases	148800
	712800
Less: Depreciation	91375	621425
Total Assets		1651425
Liabilities and owners' equity
Accounts Payable		572400
Bank loan payable		15000
Income Tax payable		135515
Total liabilities		722915
Common Stock		474000
Retained earnings
Balance as at January 1	259500
Net income	195010	454510
Total Liabilities and equity		1651425
Depreciation Expense:
Equipment will have 8 years life with no salvage value.
On the opening balance (564,000/ 8)*(3/12)		17625
On the purchases made in January (36,000/8)*(3/12)		1125
On the purchases made in February (91,200/8)*(2/12)		1900
On the purchases made in January (21,600/8)*(1/12)		225
Total Depreciation		20875