Question

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:

1. As of December 31 (the end of the prior quarter), the company’s general ledger showed the following account balances:

		Debits		Credits
Cash	$	55,000
Accounts receivable		212,000
Inventory		60,000
Buildings and equipment (net)		365,000
Accounts payable			$	89,625
Common stock				500,000
Retained earnings				102,375
	$	692,000	$	692,000

2. Actual sales for December and budgeted sales for the next four months are as follows:

December (actual)	$	265,000
January	$	400,000
February	$	597,000
March	$	312,000
April	$	208,000

3. 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.

4. The company’s gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.)

5. Monthly expenses are budgeted as follows: salaries and wages, $30,000 per month: advertising, $66,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $44,500 for the quarter.

6. Each month’s ending inventory should equal 25% of the following month’s cost of goods sold.

7. 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.

8. During February, the company will purchase a new copy machine for $2,500 cash. During March, other equipment will be purchased for cash at a cost of $77,500.

9. During January, the company will declare and pay $45,000 in cash dividends.

10. 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

Solution 1:
Schedule of expected cash collections
Particulars	January	February	March	Quarter
Budgeted Sales	$400,000.00	$597,000.00	$312,000.00	$1,309,000.00
Cash Sale	$80,000.00	$119,400.00	$62,400.00	$261,800.00
Collection for credit sales	$212,000.00	$320,000.00	$477,600.00	$1,009,600.00
Total Collections	$292,000.00	$439,400.00	$540,000.00	$1,271,400.00
Solution 2a:
Merchandise Purchase Budget
Particulars	January	February	March	Quarter
Budgeted Cost of Goods Sold (60% of Sales)	$240,000.00	$358,200.00	$187,200.00	$785,400.00
Add: Desired ending merchandise inventory (25% of next month COGS)	$89,550.00	$46,800.00	$31,200.00	$31,200.00
Total Needs	$329,550.00	$405,000.00	$218,400.00	$816,600.00
Less: Beginning inventory	$60,000.00	$89,550.00	$46,800.00	$60,000.00
Required purchases	$269,550.00	$315,450.00	$171,600.00	$756,600.00
Solution 2b:
Schedule of expected cash disbursement - Merchandise Purchases
Particulars	January	February	March	Quarter
March Purchases	$89,625.00			$89,625.00
April Purchases	$134,775.00	$134,775.00		$269,550.00
May Purchases		$157,725.00	$157,725.00	$315,450.00
June Purchases			$85,800.00	$85,800.00
Total Disbursement	$224,400.00	$292,500.00	$243,525.00	$760,425.00
Solution 3:
Schedule of expected cash disbursement of Selling and Administrative expenses
Particulars	January	February	March	Quarter
Salaries and wages	$30,000.00	$30,000.00	$30,000.00	$90,000.00
Advertising	$66,000.00	$66,000.00	$66,000.00	$198,000.00
Shipping (5% of sales)	$20,000.00	$29,850.00	$15,600.00	$65,450.00
Other expenses (3% of sales)	$12,000.00	$17,910.00	$9,360.00	$39,270.00
Total Disbursement	$128,000.00	$143,760.00	$120,960.00	$392,720.00
Cash Budget - Hillyard company
Particulars	January	February	March	Quarter
Opening Cash balance	$55,000.00	$30,600.00	$31,240.00	$55,000.00
Add: Collection from customers	$292,000.00	$439,400.00	$540,000.00	$1,271,400.00
Total Cash Available	$347,000.00	$470,000.00	$571,240.00	$1,326,400.00
Less - Cash Disbursement:
For Inventory	$224,400.00	$292,500.00	$243,525.00	$760,425.00
For Selling and administrative Expenses	$128,000.00	$143,760.00	$120,960.00	$392,720.00
For Equipment	$0.00	$2,500.00	$77,500.00	$80,000.00
For Cash Dividend	$45,000.00	$0.00	$0.00	$45,000.00
Total Cash disbursement	$397,400.00	$438,760.00	$441,985.00	$1,278,145.00
Excess (deficiency) of cash available over disbursements	-$50,400.00	$31,240.00	$129,255.00	$48,255.00
Financing:
Borrowings	$81,000.00	$0.00	$0.00	$81,000.00
Repayments	$0.00	$0.00	-$81,000.00	-$81,000.00
Interest	$0.00	$0.00	-$2,430.00	-$2,430.00
Total Financing	$81,000.00	$0.00	-$83,430.00	-$2,430.00
Ending cash balance	$30,600.00	$31,240.00	$45,825.00	$45,825.00

Solution 4:
Absorption costing income statement - Hillyard Company
for quarter ended March 31
Particulars	Amount
Sales	$1,309,000.00
Cost of goods sold (60%)	$785,400.00
Gross profit	$523,600.00
Operating expenses:
Salaries and wages	$90,000.00
Advertising	$198,000.00
Shipping (5% of sales)	$65,450.00
Other expenses (3% of sales)	$39,270.00
Depreciation	$44,500.00
Total operating expenses	$437,220.00
Operating income	$86,380.00
Interest expense	$2,430.00
Net Income	$83,950.00
Solution 5:
Balance Sheet- Hillyard Company
31-Mar
Particulars	Amount
Assets:
Cash	$45,825.00
Accounts receivables ($312000*80%)	$249,600.00
Inventory	$31,200.00
Building and equipment, net ($365000 +$2,500+ $77,500- $44500)	$400,500.00
Total Assets	$727,125.00
Liabilities and stockholder's Equity:
Accounts payable (171600*50%)	$85,800.00
Common Stock	$500,000.00
Retained Earnings ($102,375 + $83,950- $45000)	$141,325.00
Total liabilities and stockholders equity	$727,125.00