Question

Near the end of 2017, the management of Isle Corp., 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 \(30 per unit and resold for \)45 per unit. The expected inventory level of 5,000 units on December 31, 2017, is more than management’s desired level for 2018, 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 \(525,000 accounts receivable balance at December 31, 2017, \)315,000 is collected in January 2018 and the remaining \(210,000 is collected in February 2018.

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, 2017, \(72,000 is paid in January 2018 and the remaining \)288,000 is paid in February 2018.

d. Sales commissions equal to 20% of sales dollars 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, 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, \)72,000; February, \(96,000; and March, \)28,800. This equipment will be depreciated using 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 contract 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 are made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of \)36,000 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

Each budgeted statement of the Isle Corp will be calculated by preparing individual budget schedulesfor the month of January, February and March.

Step-by-step solution

(1) Monthly sales budget

Isle Corp

Sales budget

For the month of January, February and March

Particulars	January	February	March
Expected sales in units	6,000	8,000	10,000
Multiply: Selling price	$45	$45	$45
Budgeted sales	$270,000	$360,000	$450,000

(2) Monthly merchandise purchases budgets

Isle Corp

Merchandise purchases budget

For the month of January, February and March

Particulars	January	February	March
Expected sales	8,000	10,000	9,000
Multiply: Ratio	25%	25%	25%
Ending inventory	2,000	2,500	2,250
Add: Budgeted units required	6,000	8,000	10,000
Required units	8,000	10,500	12,250
Less: Beginning inventory	5,000	2,000	2,500
Units to be purchased	3,000	8,500	9,750
Multiply: Cost per unit	$30	$30	$30
Total purchase cost	$90,000	$255,000	$292,500

(3) Monthly selling expense budgets

Isle Corp
Selling expense budget
For the month of January, February and March
Particulars	January	February	March
Sales commission @20% of sales	$54,000	$72,000	$90,000
Add: Sales salaries	$7,500	$7,500	$7,500
Total selling expense	$61,500	$79,500	$97,500

(4) Monthly general and administrative expense budgets

Isle Corp
General and administrative expense budget
For the month of January, February and March
Particulars	January	February	March
General and administrative salaries	$12,000	$12,000	$12,000
Add: Maintenance expense	$3,000	$3,000	$3,000
Add: Depreciation expense	$6,375	$7,375	$7,675
Total general and administrative expense	$21,375	$22,375	$22,675

(5) Monthly capital expenditures budgets

Isle Corp
Capital expenditure budget
For the month of January, February and March
Particulars	January	February	March
Equipment purchased	$72,000	$96,000	$28,800
Add: Land purchased			$150,000
Total capital expenditure	$72,000	$96,000	$178,800

(6) Monthly cash budgets

Isle Corp

Cash budget

For the month of January, February and March

Particulars	January	February	March
Beginning cash balance	$36,000	$182,850	$10,850
Add: Cash receipts	$382,500	$421,500	$355,500
Total cash receivables	$418,500	$604,350	$463,350
Cash disbursements
Merchandise purchased	$72,000	$306,000	$123,000
Sales commissions	$54,000	$72,000	$90,000
Sales salaries	$7,500	$7,500	$7,500
General and administrative expense	$12,000	$12,000	$12,000
Maintenance expense	$3,000	$3,000	$3,000
Equipment purchased	$72,000	$96,000	$28,800
Land purchased			$150,000
Taxes			$90,000
Interest paid	$150
Total cash disbursements	$220,650	$496,500	$504,300
Preliminary cash balance	$197,850	$107,850	$40,950
Repayment of bank loan	($15,000)
Additional loan			$76,950
Ending cash balance	$182,850	$107,850	$36,000

Working notes:

Particulars	January	February	March
Cash collections:
Accounts receivables	$315,000	$210,000
Jan sales		$121,500	$81,000
Feb sales			$162,000
Total collections on sales	$315,000	$331,500	$243,000
Add: Cash sales @25%	$67,500	$90,000	$112,500
Cash receipts	$382,500	$421,500	$355,500

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

Isle Corp
Budgeted Income Statement
For the first quarter
Particulars		Amount
Sales		$1,080,000
Cost of goods sold		$720,000
Gross margin		$360,000
Operating expenses
Sales commission	$216,000
Salaries	$22,500
General and administrative expense	$36,000
Maintenance expense	$9,000
Depreciation expense	$21,425
Interest expense	$150
Total operating expense		$305,075
Income before income taxes		$54,925
Income tax expense @40%		$21,970
Net Income		$32,955

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

Isle Corp
Budgeted Balance sheet
As on March 31, 2018
Assets		Amount
Current assets
Cash	$36,000
Accounts receivables	$445,500
Merchandise inventory	$67,500
Total current assets		$549,000
Land		$150,000
Equipment	$736,800
Less: Accumulated depreciation	$88,925
Net equipment		$647,875
Total Assets		$1,346,875
Liabilities		Amount
Liabilities and Equity
Liabilities
Accounts payable	$496,500
Income tax payable	$21,970
Bank loan payable	$76,950
Total current liabilities		$595,420
Stockholder’s Equity
Common Stock	$472,500
Retained Earnings	$278,955
Total stockholder’s equity		$751,455
Total liability and equity		$1,346,875