Question 1 - Abacus Company sells its product for $190 per unit. Its actual and projected sales follow.
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Units
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Dollars
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April (actual)
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8,500
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$1,615,000
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May (actual)
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3,200
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608,000
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June (budgeted)
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6,000
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1,140,000
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July (budgeted)
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7,500
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1,425,000
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August (budgeted)
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4,400
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836,000
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All sales are on credit. Recent experience shows that 26% of credit sales is collected in the month of the sale, 44% in the month after the sale, 25% in the second month after the sale, and 5% proves to be uncollectible. The product's purchase price is $110 per unit. All purchases are payable within 13 days. Thus, 60% of purchases made in a month is paid in that month and the other 40% is paid in the next month. The company has a policy to maintain an ending monthly inventory of 19% of the next month's unit sales plus a safety stock of 90 units. The April 30 and May 31 actual inventory levels are consistent with this policy. Selling and administrative expenses for the year are $1,824,000 and are paid evenly throughout the year in cash. The company's minimum cash balance at month-end is $85,000. This minimum is maintained, if necessary, by borrowing cash from the bank. If the balance exceeds $85,000, the company repays as much of the loan as it can without going below the minimum. This type of loan carries an annual 11% interest rate. On May 31, the loan balance is $48,500, and the company's cash balance is $85,000.
Required:
1. Prepare a table that shows the computation of cash collections of its credit sales (accounts receivable) in each of the months of June and July.
2. Prepare a table that shows the computation of budgeted ending inventories (in units) for April, May, June, and July.
3. Prepare the merchandise purchases budget for May, June, and July. Report calculations in units and then show the dollar amount of purchases for each month.
4. Prepare a table showing the computation of cash payments on product purchases for June and July.
5. Prepare a cash budget for June and July, including any loan activity and interest expense. Compute the loan balance at the end of each month.
Question 2 - Near the end of 2011, the management of Simid Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2011.
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SIMID SPORTS COMPANY Estimated Balance Sheet
December 31, 2011
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Assets
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Cash
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$35,500
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Accounts receivable
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520,000
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Inventory
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95,000
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Total current assets
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650,500
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Equipment
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$539,000
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Less accumulated depreciation
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67,375
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471,625
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Total assets
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$1,122,125
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Liabilities and Equity
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Accounts payable
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$380,000
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Bank loan payable
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16,000
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Taxes payable (due 3/15/2012)
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91,000
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Total liabilities
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$487,000
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Common stock
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474,500
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Retained earnings
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160,625
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Total stockholders' equity
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635,125
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Total liabilities and equity
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$1,122,125
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To prepare a master budget for January, February, and March of 2012, management gathers the following information.
a. Simid Sports' single product is purchased for $20 per unit and resold for $57 per unit. The expected inventory level of 4,750 units on December 31, 2011, is more than management's desired level for 2012, which is 20% of the next month's expected sales (in units). Expected sales are: January, 7,500 units; February, 8,500 units; March, 10,750 units; and April, 9,500 units.
b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 70% is collected in the first month after the month of sale and 30% in the second month after the month of sale. For the December 31, 2011, accounts receivable balance, $130,000 is collected in January and the remaining $390,000 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, 2011, accounts payable balance, $85,000 is paid in January and the remaining $295,000 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 $156,000 per year. Maintenance expense equals $1,900 per month and is paid in cash.
f. Equipment reported in the December 31, 2011, balance sheet was purchased in January 2011. 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, $30,000. 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. Simid 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 $30,315 in each month.
i. The income tax rate for the company is 30%. 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 2012; 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, 2012.