Chapter 7, Problem 8PSA

Near the end of 2015, the management of Dimondale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31,2015.

DIMSOALE SPORTS COMPANY Estimated Balance Sheet December 31,2015
Assets			Liabilities and Equity
Cash	$ 36,000		Accounts payable	$360,000
Accounts receivable	525,000		Bank loan payable	15,000
Inventory	150,000		Taxes payable (due 3/15/2016)	90,000
Total current assets		$ 711,000	Total Liabilities		$ 465,000
Equipment	540,000		Common stock	472,500
Less: Accumulated depreciation	67,500		Retained earnings	246,000
Equipment, net		472,500	Total stockholders’ equity		718,500
Total assets		$1,183,500	Total Liabilities and equity		$1,183,500

To prepare a master budget for January, February, and March of 2016, management gathers the following information.

1. Dimondale Sport’s single product is purchased for $30 per unit resold for $55 per unit. The expected inventory level of 5,000 units on December 31,2015, is more than management’s desired level for 2016, 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.
2. 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 31,2015, accounts receivable balance, $125,000 is collected in January and the remaining $400,000 is collected in February.
3. Merchandise purchases are paid for as follow: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31,2015, accounts payable balance, $80,000 is paid in January and the remaining $280,000 is paid in February.
4. Sales commission equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $60,000 per year.
5. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,000 per month and is paid in cash.
6. Equipment reported in the December 31, 2015, balance sheet was purchased in January 2015. It is being depreciated over eight year 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 depreciation is taken for the month in which equipment is purchased.
7. The company plans to acquire 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.
8. Dimondale Sport 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 in each month.
9. The income tax rate for the company is 40%. Income taxes on the quarter’s income will not be paid until April 15.

Required

Prepare a master budget for each of the first three months of 2016; 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, 2016.

To determine

Concept introduction:

Master forecast

Master budget is a detailed plan starting with sales forecast and ends with money (cash) forecast and with statement of finance. It is also known as joint forecast manufactured by company at a very small level. It also includes budget for money(cash), forecasted statement of finance and monetary plan.

Sales forecast:

It relates to the monetary plan that shows the way capital can be assigned for achieving sales target. The aim of this budget is to curb and plan the expenditure incurred for objective achievement.

Sales forecast for the first quarter of the calendar.

Answer to Problem 8PSA

Therefore, it is determined that sales forecast for quarter first is $1485000.

Explanation of Solution

Sales forecast:

It relates to the monetary plan of capital for achieving sales target. The aim of this budget is to curb and plan for the expenditure incurred for objective achievement with respect to sales.

So, computation of sales forecast is given below.

DS company forecast for sales
Particulars	Forecasted units	Unit value	Dollar(total)
January	7000	55	385000
February	9000	55	495000
March	11000	55	605000
first quarter total	27000		1485000

Therefore, it is determined that sales forecast for quarter first is $1485000.

To determine

Concept introduction:

A commodity purchase forecast (budget)is one of the activities from which income can be generated. It is based on the required number of commodities sold as per the commodity sales budget.

Requirement 2:

To show:

The purchase budget (forecast)for the first quarter of the calendar.

Answer to Problem 8PSA

Therefore, it is determined that the commodity purchase forecast (budget)for Jan is 114000 for Feb it is 282000 and for March it is 324000.

Explanation of Solution

DS company commodity purchase forecast (budget)
Particulars	January	February	March
Forecast sales for succeeding month	9000	11000	10000
Ratio of stock to upcoming sales	*.20	*.20	*.20
Forecasted closing stock	1800	2200	2000
Add- forecasted sales	7000	9000	11000
Required available commodity	8800	11200	13000
Less-opening stock	(5000)	(1800)	(2200)
Units to be purchased	3800	9400	10800
Forecast cost per unit in $	30	30	30
Forecast commodity purchase in $	114000	282000	324000

Therefore, it is determined that the commodity purchase forecast (budget) for the first three months i.e. Jan, Feb and March are $114, 000; $282, 000and$324, 000 respectively.

To determine

Concept introduction:

Forecast for selling expenses involves sales, predictions for marketing, engineering and accounting.

Requirement 3:

Selling expenses for the first quarter of the calendar.

Answer to Problem 8PSA

Hence, it is determined that selling expenses forecast for Jan is $82000, for Feb is $104000and for March it is $126000.

Explanation of Solution

Forecasts for selling expenses are predictions relating to non-producing department i.e. sales, marketing, engineering and accounting.

So, computation of selling expenses forecast is given below.

DS company selling expenses forecast
Particulars	January	February	March
Forecasted sales	385000	495000	605000
Commission percentage sales	*.20	*.20	*.20
Expenses related to sales commission	77000	99000	121000
Salaries of sales	5000	5000	5000
Selling expenses in total	$82000	$104000	$126000

Hence, it is determined that selling expenses forecast for Jan is $82000, for Feb; $104000and for March it is $126000.

To determine

Concept introduction:

Administrative and general expenditure forecast relates to the expenditure for the company i.e. rent, utilities and insurance. It does not include expenditure of commodities and services.

Requirement 4:

Administrative and general expenses forecast for the first quarter of the calendar.

Answer to Problem 8PSA

Hence, it is determined that administrative and general expenses forecast for Jan is $20000, for Feb it is $21000 and for March it is $21300.

Explanation of Solution

Administrative and general expenditure forecast relates to that expenditure made on rent, utilities and insurance. It does not include expenditure on commodities and services.

So, computation of Administrative and general expenditure forecast is given below.

DS company administrative and general expenses forecast
Particulars	January	February	march
Salaries	12000	12000	12000
Maintenance	2000	2000	2000
Depreciation	6000	7000	7300
Expenses total	$16500	$16500	$16500

Hence, it is determined that administrative and general expenses forecast for Jan is $20000, for Feb is $21000 and for March it is $21300.

To determine

Concept introduction:

Capital expenditure forecast (budget) represents the amount expected from investment. It determines the capacity to produce and accordingly cash forecast is prepared.

Capital expenditure forecast (budget)for the first quarter of the calendar.

Answer to Problem 8PSA

Hence, it is determined that Capital expenditure forecast (budget) for Jan is $36000, for Feb; is $96000 and for March = $178800.

Explanation of Solution

Capital expenditure forecast (budget) represents the amount expected from investment. It determines the capacity to produce and cash forecast is prepared.

So, computation of Capital expenditure forecast (budget) is given below.

DS companyCapital expenditure forecast (budget)
Particulars	January	February	March
Equipment purchased	36000	96000	28800
Land purchase	-	-	150000
Total	36000	96000	178800

Hence, it is determined that Capital expenditure forecast (budget) for Jan is $3600 and Feb is $96000 and for March it is $178800.

To determine

Concept introduction:

Cash received shows the outflow and inflow of money(cash) on the period to assess the money(cash) balance to meet the obligation of cash.

Cash forecast for the first quarter of the calendar.

Answer to Problem 8PSA

Therefore, the closing balance for January $30100, for February $210300 and for March $143400.

Explanation of Solution

Cash received forecast shows the outflow and inflow of money(cash) in the period to assess the money(cash) balance to meet the obligation of cash. So, computation of cash received is given below.

Supporting calculation
Particulars	January	February	March
Total sales	385000	495000	605000
Cash sales (25%)	96250	123750	151250
Amount due from last month(75%of credit sales)	288750	371250	453750
Total cash received	$488925	$481770	$468653
Cash collection
Amount to received at 31/12/16	125000	400000
Month after sale (60%)		173250	222750
First month (40%)			115500
Credit from customer	125000	573250	338250
Cash sales	96250	123750	151250
Total cash received	221250	697000
Supporting calculation	January	February	March
Purchases on credit	114000	282000	324000
Amount to be paid	80000	280000
Month after purchase (20%)		22800	56400
First month (80%)	80000	302800	147600
DS company cash budget	January	February	March
Opening cash balance	36000	30100	210300
Cash received from customer	221250	697000	489500
Available cash	257250	727100	699800
Disposal of cash
Payment for commodity	80000	302800	147600
Commissions on sales	77000	99000	121000
Salaries sales	5000	5000	5000
Administrative and salaries	12000	12000	12000
Expenses for maintenance	2000	2000	2000
Interest (15000*1%)	150
Tax payable			90000
Purchase of equipment	36000	96000	28800
Purchase of land			150000
Total cash disposal	212150	516800	556400
Cash balance preliminary	45100	210300	143400
Bank loan payment	(15000)
Closing balance of cash	30100	210300	143400

Therefore, the closing balance for January; $30100, for February; $210300 and March:$143400.

To determine

Concept introduction:

Forecasted statement of income assesses the financial standing of the company. It depicts the income, expenses and net income of a firm in a period.

Requirement 7:

Forecasted income statement for the entire first quarter.

Answer to Problem 8PSA

Hence, it is determined that net revenue for first quarter is; $180330.

Explanation of Solution

Forecasted statement of income assesses the financial standing of the company. It depicts the income, expenses, net income of a firm in a period.

So, computation of income statement forecast is given below.

DS company forecasted income statement
Sales		$1485000
Cost of goods sold(COGS)(27000*$30)		810000
Gross profit		675000
Running expenses
Commission on sales	297000
Salaries	15000
Administrative & general salaries	36000
Maintenance expenses	6000
Depreciation	20300
Interest expenses	150	374450
Before tax income		300550
Tax (300550*40%)		23415
Net revenue		180330

Hence, it is determined that net revenue for first quarter is $180330.

To determine

Concept introduction:

Financial statement also known as balance sheet helps in summarizing assets, liabilities and equity of the company held by shareholders.

Financial statement for the entire first quarter.

Answer to Problem 8PSA

Hence, it is determined that total of asset and liabilities for first quarter is $1568650.

Explanation of Solution

Financial statement also known as balance sheet helps in summarizing assets, liabilities and equity of the company held by shareholders.

So, computation of Financial statement forecast is given below.

DS company forecasted income statement
Asset
Cash		143400
Amount due		602250
Raw material stock		60000
Total current asset		805650
Land		150000
Equipment	700800
Less-depreciation	87800	613000
Total of asset		$1568650
Liabilities and equities
Account to be paid		549600
Bank loan		0
Taxes		120220
Total of liabilities		669820
Common inventory	472500
Retained income	426330
Total equity shareholder		898830
Total equity and liabilities		1568650

Hence, it is determined that total asset and liabilities is $1568650.

Working notes

Accounts	Amount due		Stock
Opening due	525000		Opening stock	150000
Credit sales	1113750		Purchases	720000
Less-amount collected	1036500		Less-cost of goods sold(COGS)	810000
Closing dues	602250		Closing stock	60000
Equipment			Depreciation
Opening equipment	540000		Opening accumulated depreciation	67500
Purchase in January	36000		Depreciation expenses	20300
Purchase in February	96000		Total	87800
Purchase in March	28800
Total	700800

Amount to be paid

Retained earning

Opening amount to be paid

$360000

Opening retained earning

246000

Purchases

720000

Net income

180330

Payments

530400

Total

$426330

Ending amount to be paid

$549600