Near the end of 2017, the management of Dimsdale Sports Co., a merchandising com
ID: 2514811 • Letter: N
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.
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.
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
Explanation / Answer
(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
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