Near the end of 2017, the management of Dimsdale Sports Co., a merchandising com
ID: 2593459 • 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. DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017 Assets Cash $ 37,000 Accounts receivable 520,000 Inventory 157,500 Total current assets $ 714,500 Equipment 588,000 Less: accumulated depreciation 73,500 Equipment, net 514,500 Total assets $ 1,229,000 Liabilities and Equity Accounts payable $ 375,000 Bank loan payable 14,000 Taxes payable (due 3/15/2018) 90,000 Total liabilities $ 479,000 Common stock 473,000 Retained earnings 277,000 Total stockholders’ equity 750,000 Total liabilities and equity $ 1,229,000 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 $30 per unit and resold for $54 per unit. The expected inventory level of 5,250 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, 7,500 units; February, 9,000 units; March, 11,500 units; and April, 10,000 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, $125,000 is collected in January and the remaining $395,000 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, $80,000 is paid in January and the remaining $295,000 is paid in February. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $66,000 per year. General and administrative salaries are $144,000 per year. Maintenance expense equals $1,800 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, $96,000; 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 $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 $35,000 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.
Explanation / Answer
1. Monthly sales budgets:
Jan
Feb
March
Total
Estimated sales in units
7,500
9000
11500
28,000
Selling price per unit
54
54
54
54
Budgeted sales
405,000
486,000
621,000
1,512,000
2. Monthly merchandise purchases budgets:
Jan
Feb
March
Total
Budgeted sales
405,000
486,000
621,000
1,512,000
Estimated sales in units
7,500
9000
11500
28,000
Add: ending inventory
1,800
2,300
2,000
2,000
Less: Opening inventory
(5,250)
(1,800)
(2,300.0)
(5,250)
Number of units to be purchased
4,050
9,500
11,200
24,750
Cost per unit
30
30
30
30
Total cost of purchases
121,500
285,000
336,000
742,500
Jan
24,300
97,200
Jan
Feb
57,000.0
228,000.0
Feb
March
67,200.0
March
Accounts payable balance Paid
80,000
295000
Accounts payable balance Paid
Merchandise purchases
104,300
449,200
295,200
Merchandise purchases
3. Monthly selling expense budgets:
Jan
Feb
March
Sales commission 20% on sales
81,000
97,200
124,200
Sales salaries = 66,000/ 12 months
5,500
5,500
5,500
selling expense budget
86,500
102,700
129,700
4. Monthly general and administrative expense budgets.
Total
General and administrative salaries are $144,000 per year/ 12 months
12,000
12,000
12,000
36,000
Maintenance expense
1,800
1800
1800
5,400
Depreciation
6,240
7,475
7,750
21,465
20,040
21,275
21,550
62,865
Depreciation expenses calculation
Annual amount
Jan
Feb
March
Total
Equipment on Dec 31, 2017
73,500
6,125
6,125
6,125
18,375
Jan purchases
4,200
350
350
350
1,050
Feb purchases
12,000
1,000
1,000
2,000
March purchases
3,300
275
275
6,475
7,475
7,750
21,700
5. Monthly capital expenditures budgets.
Jan
Feb
March
Total
Equipment purchase
33,600
96000
26400
156,000
Land purchased
170000
170000
33,600
96,000
196,400
326,000
6. Monthly cash budgets.
Jan
Feb
March
Beginning cash balance
37,000
173,198
195,608
Cash receipts from customers
Cash sales
101,250
121,500
155,250
Jan
185,288
118,462.50
feb
222,345.00
142,155.00
March
284,107.50
Accounts receivable balance collected
125,000
395000
Total cash available
448,538
1,030,505
777,120
Less: Cash disbursements:
Payments for merchandise
(104,300)
(449,200)
(295,200)
Sales expenses
(86,500)
(102,700)
(129,700)
General and administrative salaries
(12,000)
(12,000)
(12,000)
Maintenance expense
(1,800)
(1,800)
(1,800)
Interest
(140)
Taxes payable
-90000
Purchase of equipment
(33,600)
-96000
-26400
Purchase of land
-170000
Total cash disbursements
(238,340)
(661,700)
(555,100)
Cash balance
210,198
368,805
222,020
Less: beginning balance
(37,000)
(173,198)
(195,608)
Closing cash balance
173,198
195,608
26,413
7. Budgeted income statement for the entire first quarter (not for each month).
sales
1,512,000
Less: COGS
(742,500)
Gross profit
769,500
Less: Operating expenses:
Sales commission
302,400
Sales salaries
16,500
General and administrative salaries
36,000
Maintenance expense
5,400
Depreciation
21,465
Interest
140
(381,905)
Income before taxes
387,595
Less: Taxes at 39%
(151,162)
Net income
236,433
8. Budgeted balance sheet as of March 31, 2018:
Assets:
Cash
35,000
Accounts receivable
465,750
Inventory
95,197
Total current assets
658,250
Land
170,000
equipment
744,000
Less: Accumulated dep.
(94,965)
649,035
Total assets
1,414,982
Liabilities and equity
Accounts payable
268,800
Bank loan payable
8,587
taxes payable
151,162
Total liabilities:
428,549
Common stock
473,000
Retained earnings
513,433
Total shareholder's equity
986,433
Total liabilities and shareholder's equity
1,414,982
Jan
Feb
March
Total
Estimated sales in units
7,500
9000
11500
28,000
Selling price per unit
54
54
54
54
Budgeted sales
405,000
486,000
621,000
1,512,000
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