Johnson Corp is interested in purchasing some new material-handling equipment right after the beginning of the new year. They would like to finance the new equipment with cash and marketable securities, but if necessary they can get a short-term loan from a local bank. You have been engaged to prepare a master budget for Johnson Corp for the first quarter of 20x1. Johnson Corp is a small, rapidly growing wholesaler of consumer electronic products. The company’s main product lines are small kitchen appliances and power tools. The marketing manager has recently completed a sales forecast. She believes the company’s sales during the first quarter of 20x1 will increase by 10 percent each month over the previous month’s sales. Then sales are expected to remain constant for several months. Johnson Corp’s projected balance sheet as of December 31, 20x0 is as follows: Cash $ 70,000 Accounts receivable 476,000 Marketable securities 30,000 Inventory 269,500 Buildings and equipment (net of accumulated depreciation) 1,252,000 Total assets $ 2,097,500 Accounts payable $ 308,700 Bond interest payable 25,000 Property taxes payable 7,600 Bonds payable (10%; due in 20x6) 600,000 Common stock 1,000,000 Retained earnings 156,200 Total liabilities and stockholders' equity $ 2,097,500 The controller is now preparing a budget for the first quarter of 20x1. In the process, the following information has been accumulated:
1) Projected sales for December 20x0 are $700,000. Credit sales are typically 80% of totals sales. Johnson Corp’s credit experience indicates that 15% of credit sales are collected during the month of sale, and the remainder are collected during the following month.
2) Johnson Corp’s cost of goods sold generally runs at 70% of sales. Inventory is purchased on account and 40% of each month’s purchases are paid during the month of purchase. The remainder is paid during the following month. In order to have adequate stocks of inventory on hand, the company attempts to have inventory on hand at the end of each month equal to half of the next month’s projected cost of goods sold.
3) The controller has estimated that Johnson Corp’s other monthly expenses will be as follows: Sales salaries $ 40,000 Advertising and promotion 35,000 Administrative salaries 37,000 Depreciation 45,000 Interest on bonds 5,000 Property taxes 1,900 In addition, sales commissions run at the rate of 2 percent of sales.
4) The company president has indicated that the company should invest $225,000 in an automated inventory-handling system to control the movement of inventory in the company’s warehouse just after the new year begins. This equipment purchase will be financed primarily from the company’s cash and marketable securities. However, the president believes the company needs to keep a minimum cash balance of $50,000. If necessary, the remainder of the equipment purchases will be financed using short-term credit from a local bank. The minimum period for such a loan is three months. The current short-term interest rates are 10 percent per year and are expected to remain at this rate through the time the equipment is purchased. If a loan is necessary, the president has decided that it should be paid off by the end of the first quarter if possible. If the entire loan cannot be paid off, the maximum amount should be paid while maintaining the minimum cash balance.
5) Johnson Corps board of directors has indicated an intention to declare and pay dividends of $100,000 on the last day of each quarter.
6) The interest on any short-term borrowing will be paid when the loan is repaid. Interest on Johnson Corps bonds is paid semi annually on January 31 and July 31 for the preceding sixmonth period. 7) Property taxes are paid semi annually on February 28 and August 31 for the preceding six-month period. Required: Prepare Johnson Corps master budget for the first quarter of 20x1 by completing the following schedules and statements.
1) Sales budget: 20x0 20x1 December January February March 1st Quarter Total sales Cash sales Sales on account
2) Cash receipts budget: 20x1 January February March 1st Quarter Cash sales Cash collections from credit sales made during current month Cash collections from credit sales made during preceding month Total cash receipts
3) Purchases budget: 20x0 20x1 December January February March 1st Quarter Budgeted cost of goods sold Add: Desired ending inventory Total goods needed Less: Expected beginning inventory Purchases
4) Cash disbursements budget: 20x1 January February March 1st Quarter Inventory purchases: Cash payments for purchases during the current month Cash payments for purchases during the preceding month Total cash payments for inventory purchases Other expenses: Sales salaries Advertising and promotion Administrative salaries Interest on bonds Property taxes Sales commissions Total cash payments for other expenses Total cash disbursements
5) Complete the first three lines of the summary budget. Then do the analysis of short-term financing needs in requirement (6). Then finish requirement (5). Summary cash budget: 20x1 January February March 1st Quarter Cash receipts (sch 2) Less: Cash disbursements (sch 4) Change in cash balance during period due to operations Sale of marketable securities (1/2/x1) Proceeds from bank loan (1/2/x1) Purchase of equipment Repayment of bank loan (3/31/x1) Interest on bank loan Payment of dividends Change in cash balance during first quarter XXXXX XXXXX XXXXX Cash balance, 1/1/x1 XXXXX XXXXX XXXXX Cash balance, 3/31/x1 XXXXX XXXXX XXXXX
6) Analysis of short-term financing needs: Projected cash balance as of December 31, 20x0 $ Less: minimum cash balance Cash available for equipment purchases $ Projected proceeds from sale of marketable securities Cash available $ Less: Cost of investment in equipment Required short-term borrowing $
7) Prepare Johnson Corp’s budgeted income statement for the first quarter of 20x1. (Ignore income taxes.)
8) Prepare Johnson Corp’s budgeted statement of retained earnings for the first quarter of 20x1.