PROBLEM 22-5B Near the end of 2015, the management of Isle Corp., a merchandisin

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PROBLEM 22-5B Near the end of 2015, the management of Isle Corp., a merchandising company, prepared the following estimated balance sheet for December 31, 2015. ISLE CORPORATION Estimated Balance Sheet 31-Dec-15 Assets Liabilities and Equity Cash 36,000 Accounts payable 360,000 Accounts Receivable 525,000 Bank loan Payable 15,000 Inventory 150,000 Taxes payable (due 3/15/2016) 90,000 Total Current Assets 711,000 Total Liabilities 465,000 Equipment 540,000 Common Stock 472,500 Less Accumulated Depreciation 67,500 Retained Earnings 246,000      Equipment, net 472,500 Total Stockholders' equity 718,500 Total Assets 1,183,500 Total liabilities and equity 1,183,500 To prepare the master budget for January, February and March of 2016, management gathers the following information a. Isle Corp.'s single product is purchased for $30 per unit and resold for $45 per unit. The expected inventory level of 5,000 units on December 31, 2015, is more than management's desired level for 2015, which is 25% of the next month's expected sales (in units). Expected sales are: January, 6,000 units; February, 8,000 units; March, 10,000 units; and April, 9,000 units. b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% in the second month after the month of sale. For the $525,000 accounts receivable balance at December 31, 2015, $315,000 is collected in January 2016 and the remaining $210,000 is collected in February 2016. c. 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 $360,000 accounts payable balance at December 31, 2015, $72,000 is paid in January 2016 and the remaining $288,000 is paid in February 2016. d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $90,000 per year. e. General and administrative salaries are $144,000 per year. Maintenance expense equals $3,000 per month and is paid in cash. f. Equipment reported in the December 31, 2015 balance sheet was purchased in January 2015. It is being depreciated over 8 years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $72,000; February, $96,000; and March, $28,800. This equipment will be depreciated using the straight-line method over 8 years with no salvage value. A full month's depreciation is taken for the month in which equipment is purchased. g. The company plans to acquire land at the end of March at a cost of $150,000, which will be paid with cash on the last day of the month. h. Isle Corp. 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 o the last day of the month. Isle has agreed to maintain a minimum ending cash balance of $36,000 in each month. i. The income ta rate for the company is 40%. Income taxes on the first quarter's income will not be paid until April 15. Prepare a master budget for the first three months of 2016. Round to the nearest dollar. PROBLEM 22-5B Near the end of 2015, the management of Isle Corp., a merchandising company, prepared the following estimated balance sheet for December 31, 2015. ISLE CORPORATION Estimated Balance Sheet 31-Dec-15 Assets Liabilities and Equity Cash 36,000 Accounts payable 360,000 Accounts Receivable 525,000 Bank loan Payable 15,000 Inventory 150,000 Taxes payable (due 3/15/2016) 90,000 Total Current Assets 711,000 Total Liabilities 465,000 Equipment 540,000 Common Stock 472,500 Less Accumulated Depreciation 67,500 Retained Earnings 246,000      Equipment, net 472,500 Total Stockholders' equity 718,500 Total Assets 1,183,500 Total liabilities and equity 1,183,500 To prepare the master budget for January, February and March of 2016, management gathers the following information a. Isle Corp.'s single product is purchased for $30 per unit and resold for $45 per unit. The expected inventory level of 5,000 units on December 31, 2015, is more than management's desired level for 2015, which is 25% of the next month's expected sales (in units). Expected sales are: January, 6,000 units; February, 8,000 units; March, 10,000 units; and April, 9,000 units. b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% in the second month after the month of sale. For the $525,000 accounts receivable balance at December 31, 2015, $315,000 is collected in January 2016 and the remaining $210,000 is collected in February 2016. c. 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 $360,000 accounts payable balance at December 31, 2015, $72,000 is paid in January 2016 and the remaining $288,000 is paid in February 2016. d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $90,000 per year. e. General and administrative salaries are $144,000 per year. Maintenance expense equals $3,000 per month and is paid in cash. f. Equipment reported in the December 31, 2015 balance sheet was purchased in January 2015. It is being depreciated over 8 years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $72,000; February, $96,000; and March, $28,800. This equipment will be depreciated using the straight-line method over 8 years with no salvage value. A full month's depreciation is taken for the month in which equipment is purchased. g. The company plans to acquire land at the end of March at a cost of $150,000, which will be paid with cash on the last day of the month. h. Isle Corp. 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 o the last day of the month. Isle has agreed to maintain a minimum ending cash balance of $36,000 in each month. i. The income ta rate for the company is 40%. Income taxes on the first quarter's income will not be paid until April 15. Prepare a master budget for the first three months of 2016. Round to the nearest dollar.

Explanation / Answer

a) Jan-16 Feb-16 Mar-16 Total Apr-16 Expected Sales 6000 8000 10000 24000 9000 Closing inventory desired - 25% of next month sale 2000 2500 2250 2250 Total inventory required 8000 10500 12250 26250 Less : opening inventory 5000 2000 2500 5000 Merchandise to be purchased 3000 8500 9750 21250 Cost per unit 30 30 30 30 Cost per month 90000 255000 292500 637500 b) Sales collection Jan-16 Feb-16 Mar-16 Total Expected Sales - units 6000 8000 10000 24000 Unit selling price 45 45 45 Selling volume 270000 360000 450000 1080000 Cash sales - 25% 67500 90000 112500 270000 Credit sales - 75% 202500 270000 337500 810000 Cash collection- December sales 315000 210000 525000 Cash collection- January sales 121500 81000 202500 Cash collection - February sales 126000 126000 Total Cash collected 315000 331500 207000 853500 c) Merchandise payment budget Jan-16 Feb-16 Mar-16 Total Merchandise purchased 90000 255000 292500 637500 Cash payment - December purchase 72000 288000 360000 Cash payment - January purchase 18000 204000 222000 Cash payment - February purchase 51000 51000 Total cash payment 72000 306000 255000 633000 d) Jan-16 Feb-16 Mar-16 Total Sales commission - 20% of sales 54000 72000 90000 216000 Sales staff salaries ( 90000/12) 7500 7500 7500 22500 e) General and administrative salaries 12000 12000 12000 36000 Maintenance expenses 3000 3000 3000 9000 f) Depriciation Equipment purchased in 2015 540000 Depriciation - pa ( 540000/8) 67500 Depriciation for 1 months( 67500/12) 5625 January purchase 72000 Depricition pa ( 72000/8) 9000 Depriciation for 1 month ( 9000/12) 750 February purchase 96000 Depricition pa ( 96000/8) 12000 Depriciation for 1 months( 12000/12) 1000 March purchase 28800 Depricition pa ( 28800/8) 3600 Depriciation for 1 months( 3600/12) 300 Depriciation Jan-16 Feb-16 Mar-16 Dec 15 purchase 5625 5625 5625 Jan purchase 750 750 750 Feb Purchase 1000 1000 March purchase 300 Total depriciation 6375 7375 7675 Cash Budget Jan-16 Feb-16 Mar-16 Total opening balance 36000 130500 36000 36000 Collections from sales ( refer b above) 315000 331500 207000 853500 Total cash available 351000 462000 243000 889500 Less : Merchandise purchase ( refer c above) 72000 306000 255000 633000 Sales commission ( refer d above) 54000 72000 90000 216000 Sales staff salaries ( refer d above) 7500 7500 7500 22500 General administrative expenses 12000 12000 12000 36000 Maintenance expense 3000 3000 3000 9000 Equipment purchase 72000 96000 28800 196800 Land purchase 150000 150000 Total cash payments 220500 496500 546300 1263300 Cash balance 130500 -34500 -303300 -207300 Loan taken 70500 339300 409800 Closing balance 130500 36000 36000 202500 Interest expense-12% pa 705 4098 4803 Master Budget Jan-16 Feb-16 Mar-16 Total Sales 270000 360000 450000 1080000 Less : Merchandise purchase 90000 255000 292500 637500 Sales commission 54000 72000 90000 216000 Sales Salaries 7500 7500 7500 22500 General and administrative expense 12000 12000 12000 36000 Maintenance expense 3000 3000 3000 9000 Depriciation 6375 7375 7675 21425 Interest expense 0 705 4098 4803 Total expenses 172875 357580 416773 947228 Net Income 97125 2420 33227 132772 Tax expenses @40% 38850 968 13291 53109 Net Income after tax 58275 1452 19936 79663

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