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.

a. The company’s single product is purchased for \(30 per unit and resold for \)55 per unit. The expected inventory level of 5,000 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, 7,000 units; February, 9,000 units; March, 11,000 units; and April, 10,000 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 December 31, 2017, accounts receivable balance, \(125,000 is collected in January and the remaining \)400,000 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, 2017, accounts payable balance, \(80,000 is paid in January 2018 and the remaining \)280,000 is paid in February 2018.

d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are \(60,000 per year.

e. General and administrative salaries are \)144,000 per year. Maintenance expense equals \(2,000 per month and is paid in cash.

f. 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, \(96,000; and March, \)28,800. 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 buy 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. 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 \)25,000 at the end of each month.

i. The income tax rate for the company is 40%. 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 (show supporting calculations as needed, and round amounts to the nearest dollar):

1. Monthly sales budgets (showing both budgeted unit sales and dollar sales).

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.

Short answer

1. The total sales budget is$1,485,000.
2. The total production budget is720,000 units.
3. The total selling expense budget is$312,000.
4. The total general and administrative expense budget are$42,000.
5. The capital expenditure budget are$310,800
6. The ending cash balance for January, February, and March are$30100, $210,300, and $143,400, respectively.
7. Net Operating income from the budgeted income statement is$180,330.
8. The total of the balance sheet is$1,568,650.

Step-by-step solution

Meaning of Budgeted Income Statement

The budgeted income statement is the type of financial statement that measures thebudgeted value of an organizations revenues and expenses and provides an estimated net income value.

(1) Preparing monthly sales budget

Dimsdale Sports Co.

Sales budget

For the month of January, February and March

Particulars	January	February	March	Totals
Budgeted unit sales	7,000	9,000	11,000	27,000
Sales price per unit	$55	$55	$55	$55
Total budgeted sales	$385,000	$495,000	$605,000	$1,485,000

Working note:

1. Calculation of cash and credit sales

Particulars	January	February	March	Totals
Total budgeted sales	$385,000	$495,000	$605,000	$1,485,000
Cash sales (25% on sales)	$96,250	$123,750	$151,250	$371,250
Credit sales (75% on sales)	$288,750	$371,250	$453,750

2. Calculation of total cash collection

Particulars	January	February	March	Totals
Cash sales	$96,250	$123,750	$151,250	$371,250
From Jan 1 account receivable	$125,000	$400,000	-	$525,000
From Jan sales		$173,250	$115,500	$288,750
From Feb sales			$222,750	$222,750
Total collection	$221,250	$697,000	$489,500	$1,407,750

3.Calculation of depreciation

$$\begin{gathered} \text{Depreciation}=\left(\frac{\$540,000+\$36,000}{8}\times \frac{1}{12}\right)+\left(\frac{\$576,000+\$96,000}{8}\times \frac{1}{12}\right)+\left(\frac{\$672,000+\$28,800}{8}\times \frac{1}{12}\right) \\ =\$7,300+\$7,000+\$6,000 \\ =\$20,300 \end{gathered}$$

(2) Preparing monthly merchandise purchases budgets

Dimsdale Sports Co.

Purchase budget

For the month of January, February and March

Particulars	January	February	March	Totals
Next months budgeted sales	9,000	11,000	10,000
Ratio of inventory	20%	20%	20%
Estimated ending inventory	1,800	2,200	2,000	6000
Add: Budgeted units sales	7,000	9,000	11,000	27,000
Required units of available production	8,800	11,200	13,000	33,000
Less: Beginning inventory	5,000	1,800	2,200	9,000
Units to be purchased	3,800	9,400	10,800	24,000
Cost per unit	$30	$30	$30	$30
Units to be produced	$114,000	$282,000	$324,000	720,000

(3) Preparing monthly selling expense budgets

Dimsdale Sports Co.

Selling expense budget

For the month of January, February and March

Particulars	January	February	March	Totals
Budgeted sales	$385,000	$495,000	$605,000	1,485,000
Sales commission rate	20%	20%	20%	20%
Sales commission	$77,000	$99,000	$121,000	$297,000

Add: Salaries	$5,000	$5,000	$5,000	$15,000
Total selling expense	$82,000	$104,000	$125,000	$312,000

 Step 5: (4) Monthly general and administrative expense budgets

Dimsdale Sports Co.

General and administrative expense budget

For the month of January, February and March

Particulars	January	February	March	Totals
Salaries ($144,000/12)	$12,000	$12,000	$12,000	$36,000
Add: Maintenance expense	$2,000	$2,000	$2,000	$6,000
Total expense	$14,000	$14,000	$14,000	$42,000

(5) Preparing monthly capital expenditures budgets

Dimsdale Sports Co.

Capital expenditure budget

For the month of January, February and March

Particulars	January	February	March	Totals
Equipment purchased	$36,000	$96,000	$28,800	$160,800
Add: Land purchased			$150,000	$150,000
Total capital expenditure	$36,000	$96,000	$178,800	$310,800

(6) Preparing monthly cash budgets

Dimsdale Sports Co.

Cash budget

For the month of January, February and March

Particulars	January	February	March
Beginning cash balance	$36,000	$30,100	$210,300
Add: Cash receipts (Working note 2)	$221,250	$697,000	$489,500
Total cash receivables	$257,250	$727,100	$699,800
Cash disbursements:
Merchandise purchased	$80,000	$302,800	$147,600
Sales commissions	$77,000	$99,000	$121,000
Sales salaries	$5,000	$5,000	$5,000
General and administrative expense	$12,000	$12,000	$12,000
Maintenance expense	$2,000	$2,000	$2,000
Equipment purchased	$36,000	$96,000	$28,800
Land purchased			$150,000
Income tax paid			$90,000

Interest paid	$150
Total cash disbursements	$212,150	$516,800	$556,400
Preliminary cash balance	$45,100	$210,300	$143,400
Repayment of bank loan	($15,000)
Ending cash balance	$30,100	$210,300	$143,400

(7) Budgeted income statement for the entire first quarter (not for each month)

Dimsdale Sports Co.

Budgeted Income Statement

For the first quarter

Particulars		Amount
Sales		$1,485,000
Cost of goods sold		$810,000
Gross margin		$675,000
Operating expenses
Sales commission	$297,000
Salaries	$15,000
General and administrative expense	$36,000
Maintenance expense	$6,000
Depreciation expense (Working note 3)	$20,300
Bank loan interest	$150
Total operating expense		$347,450
Income before income taxes		$300,550
Income tax expense		$120,220
Net Income		$180,330

(8) Budgeted balance sheet as of March 31, 2018

Dimsdale Sports Co.

Budgeted Balance sheet

As on March 31, 2018

Assets		Amount
Current assets
Cash	$143,400
Accounts receivables	$602,250
Merchandise inventory	$60,000
Total current assets		$805,650
Land		$150,000
Equipment	$700,800
Less: Accumulated depreciation	$87,800
Net equipment		$613,000
Total Assets		$1,568,650
Liabilities		Amount
Liabilities and Equity
Liabilities
Accounts payable	$549,600
Income tax payable	$120,220
Total current liabilities		$684,820
Stockholder’s Equity
Common Stock	$472,500
Retained Earnings	$426,330
Total stockholder’s equity		$898,830
Total liability and equity		$1,568,650