Near the end of 2013, the management of Dimsdale Sports Co., a merchandising com

Question

Near the end of 2013, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2013.

  

To prepare a master budget for January, February, and March of 2014, management gathers the following information.

Dimsdale Sports’ single product is purchased for $30 per unit and resold for $53 per unit. The expected inventory level of 5,000 units on December 31, 2013, is more than management’s desired level for 2014, which is 20% of the next month’s expected sales (in units). Expected sales are: January, 7,000 units; February, 9,100 units; March, 11,000 units; and April, 11,000 units.

Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 63% is collected in the first month after the month of sale and 37% in the second month after the month of sale. For the December 31, 2013, accounts receivable balance, $120,000 is collected in January and the remaining $400,000 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, 2013, accounts payable balance, $85,000 is paid in January and the remaining $275,000 is paid in February.

Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $72,000 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, 2013, balance sheet was purchased in January 2013. 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, $35,000; February, $96,000; and March, $29,500. 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 acquire 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.

Dimsdale 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 $350 in each month.

The income tax rate for the company is 37%. Income taxes on the first quarter’s income will not be paid until April 15.

  

Prepare a master budget for each of the first three months of 2014; include the following component budgets:

credit sales from

Collections of receivables

DIMSDALE SPORTS COMPANY
Estimated Balance Sheet
December 31, 2013 Assets   Cash $ 35,500   Accounts receivable 520,000   Inventory 150,000      Total current assets 705,500   Equipment $ 539,000   Less accumulated depreciation 67,375         Equipment, net 471,625      Total assets $ 1,177,125    Liabilities and Equity   Accounts payable $ 360,000   Bank loan payable 15,000   Taxes payable (due 3/15/2014) 91,000      Total liabilities $ 466,000   Common stock 472,500   Retained earnings 238,625      Total stockholders’ equity 711,125      Total liabilities and equity $ 1,177,125   

Explanation / Answer

Calculation of cash receipts from customers Monthly Sales Budgets Jan-14 Feb-14 Mar-14 Sales in units 7000 9100 11000 Sales price 53 53 53 Sales Revenue in   $ 371000 482300 583000 Cash sales 74200 96460 116600 Credit sales 296800 385840 466400 Collected in AR, January 01, 120000 400000 Credit sales from January 186984 243079 February 109816 March 0 Total collection of receivables 120000 586984 352895.2 Total Cash receipts 194200 683444 469495.2 Calculation of payment to suppliers Beginning Inventory of merchandise        A 5000 1820 2200 Budgeted sales in units       B 7000 9100 11000 Ending Inventory of merchandise           C 1820 2200 2000 No. of units to be purchased C+B-A 3820 9480 10800 Cost per unit 30 30 30 Total cost of purchases $ 114600 284400 324000 Total Jan-14 Feb-14 Mar-14 paid in Merchandise purchases in AP, January 01, 360000 85000 275000 January 22920 91680 February 56880 March 0 Total cash paid for merchandise 85000 297920 148560

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