Near the end of 2013, the management of Dimsdale Sports Co., a merchandising com
ID: 2772275 • Letter: N
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.
DIMSDALE SPORTS COMPANY
Estimated Balance Sheet
December 31, 2013
Assets
Cash
$
36,000
Accounts receivable
520,000
Inventory
100,000
Total current assets
656,000
Equipment
$
539,000
Less accumulated depreciation
67,375
Equipment, net
471,625
Total assets
$
1,127,625
Liabilities and Equity
Accounts payable
$
365,000
Bank loan payable
15,000
Taxes payable (due 3/15/2014)
90,000
Total liabilities
$
470,000
Common stock
471,000
Retained earnings
186,625
Total stockholders’ equity
657,625
Total liabilities and equity
$
1,127,625
To prepare a master budget for January, February, and March of 2014, management gathers the following information.
a.
Dimsdale Sports’ single product is purchased for $20 per unit and resold for $55 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, 6,750 units; February, 9,100 units; March, 10,500 units; and April, 10,500 units.
b.
Cash sales and credit sales represent 20% and 80%, 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, 2013, accounts receivable balance, $125,000 is collected in January and the remaining $395,000 is collected in February.
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 December 31, 2013, accounts payable balance, $85,000 is paid in January and the remaining $280,000 is paid in February.
d.
Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $54,000 per year.
e.
General and administrative salaries are $144,000 per year. Maintenance expense equals $2,200 per month and is paid in cash.
f.
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, $36,000; February, $97,000; 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.
g.
The company plans to acquire land at the end of March at a cost of $165,000, which will be paid with cash on the last day of the month.
h.
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 $6,150 in each month.
i.
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 2014; include the following component budgets:
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Near the end of 2013, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2013.
Explanation / Answer
Particulars January February March Sales in units 6750 9100 10500 Selling price per unit $55.00 $55.00 $55.00 Total budgeted sales $371,250.00 $500,500.00 $577,500.00 Cash Sales $74,250.00 $100,100.00 $115,500.00 Sales on credit $297,000.00 $400,400.00 $462,000.00 Collections in Particulars Total January February March Accounts receivable -January 1st $520,000.00 $125,000.00 $395,000.00 Credit sales from January $297,000.00 $181,170.00 $115,830.00 February $400,400.00 $244,244.00 $156,156.00 March Total $1,217,400.00 $306,170.00 $755,074.00 $156,156.00 Total cash receipts from customers Particulars January February March Cash sales $74,250.00 $100,100.00 $115,500.00 Collection of receivable $306,170.00 $755,074.00 $156,156.00 Total $380,420.00 $855,174.00 $271,656.00 Calculation of payments for merchandise Particulars January February March Desired ending inventory 1820 2100 2100 Budgeted Sales in units 6750 9100 10500 Total units required 8570 11200 12600 Beginning inventory 5000 1820 2100 Number of units to be purchased 3570 9380 10500 Cost per unit $20.00 $20.00 $20.00 Total cost of purchase $71,400.00 $187,600.00 $210,000.00 Accounts payable -January 1st Total January February March Merchandise purchased in $365,000.00 $85,000.00 $280,000.00 January $71,400.00 $14,280.00 $57,120.00 February $37,520.00 $37,520.00 March Total $473,920.00 $85,000.00 $294,280.00 $94,640.00
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