Question

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017 Assets Cash $ 36,000 Accounts receivable 520,000 Inventory 100,000 Total current assets $ 656,000 Equipment 576,000 Less: accumulated depreciation 72,000 Equipment, net 504,000 Total assets $ 1,160,000 Liabilities and Equity Accounts payable $ 370,000 Bank loan payable 14,000 Taxes payable (due 3/15/2018) 91,000 Total liabilities $ 475,000 Common stock 474,000 Retained earnings 211,000 Total stockholders’ equity 685,000 Total liabilities and equity $ 1,160,000 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 $20 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, 9,250 units; March, 11,250 units; and April, 9,000 units. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 61% is collected in the first month after the month of sale and 39% 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, $65,000 is paid in January and the remaining $305,000 is paid in February. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $60,000 per year. General and administrative salaries are $132,000 per year. Maintenance expense equals $2,100 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, $33,600; February, $91,200; and March, $26,400. 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 $175,000, 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 $49,000 at the end of each month. The income tax rate for the company is 39%. 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. Need help with the last 4 steps

Answer 1

Solution:

1) Preparing Monthly Sales Budgets:

DIMSDALE SPORTS CO. Sales Budget For January, February and March 2018
	Budgeted Unit Sales (A)	Budgeted Unit Price (B)	Budgeted Total Dollars (A*B)
January	7,000	55	385,000
February	9,250	55	508,750
March	11,250	55	618,750
Total Sales for the Quarter	27,500		1,512,500

2) Preparing Monthly Merchandise Purchases Budgets:

DIMSDALE SPORTS CO. Merchandise Purchases Budget January, February and March 2018
	January	February	March	Total
Next Month's Budgeted Sales (Units)	9,250	11,250	9,000
Ratio of Inventory to Future Sales	20%	20%	20%
Budgeted Ending Inventory (Units)	1,850	2,250	1,800
Budgeted Unit Sales for Month	7,000	9,250	11,250
Budgeted Unit Sales for Month	8,850	11,250	13,050
Beginning Inventory (Units)	(5,000)	(1,850)	(2,250)
Units to be Purchased	3,850	9,650	10,800	24,300
Budgeted Cost Per Unit	20	20	20	20
Budgeted Merchandise Purchase	77,000	193,000	216,000	486,000

3) Preparing the Monthly Selling Expense Budgets:

DIMSDALE SPORTS CO. Selling Expense Budget January, February and March 2018
	January	February	March	Total
Budgeted Sales	385,000	508,750	618,750	1,512,500
Sales Commission Percentage	20%	20%	20%	20%
Sales Commissions	77,000	101,750	123,750	302,500
Salary for Sales Managers	5,000	5,000	5,000	15,000
Total Selling Expenses	82,000	106,750	128,750	317,500

4) Preparing the Monthly General and Administrative Expense Budgets:

DIMSDALE SPORTS CO. General and Administrative Expense Budget January, February and March 2018
	January	February	March	Total
Salaries	11,000	11,000	11,000	33,000
Maintenance	2,100	2,100	2,100	6,300
Depreciation	6,350	7,300	7,575	21,225
Total General and Administrative Expenses	19,450	20,400	20,675	60,525

5) Preparing the Monthly Capital Expenditures Budgets:

DIMSDALE SPORTS CO. Capital Expenditures Budget January, February and March 2018
	January	February	March
Equipment Purchases	33,600	91,200	26,400
Land Purchase	0	0	175,000
Total Capital Expenditure	33,600	91,200	201,400