Chapter 8, Problem 12E

1.

To determine

the value of the collection in the month of July, August, September and October

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Total cash collection of the July August, September and December are $209,500, 217,500, 226,500 and $227,000.

Calculate the expected cash collection,

Particulars	July	August	September	October
Sales	210,000	230,000	220,000	240,000
Collection
35% in month of sales	73,500	80,500	77,000	84,000
65% in the month of following	0	136,500	149,500	143,000
Collection from account receivable	136,000	0	0	0
Total cash collection	209,500	217,000	226,500	227,000
Table (1)

2.

a.

To determine

the value of the merchandise purchase for the quarter ended September

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Formula to calculate the merchandise purchase for the quarter ended September,

$\text{Marchandise}\text{purchases}=\left(\begin{array}{l}\text{Closing}\text{inventory}\text{of}\text{July}+\text{Closing}\text{inventory}\text{of}\text{August}\\ +\text{Closing}\text{inventory}\text{of}\text{September}\end{array}\right)$

Substitute, $41,400 for the closing inventory July, $39,600 for the closing inventory of August and $43,200 for the September

$\begin{array}{c}\text{Marchandise}\text{purchases}=\$41,400+\$39,600+\$43,200\\ =\$124,600\end{array}$

Working notes:

Calculation of merchandise purchase budget

Particulars	July	August	September	October
Sales	210,000	230,000	220,000	240,000
Cost of goods sold (60%)	126,000	138,000	132,000	144,000
Less: Opening inventory	62,000	41,400	39,600
Add: closing inventory(30% of the next month cost of goods sold)	41,400	39,600	43,200
Table (2)

b.

To determine

The value of the merchandise purchases

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Formula to calculate total cash disbursement for merchandise purchase for the quarter ended September,

$\text{Cash disbursement}\text{marchandise}\text{purchases}=\left(\begin{array}{l}\text{Marchandise}\text{purchases}\text{for}\text{July}+\text{Marchandise}\text{purchases}\text{for}\text{August}\\ +\text{Marchandise}\text{purchases}\text{for}\text{September}\end{array}\right)$

Substitute, $113,200 for merchandise purchase in month July, $117,200for merchandise purchase in month of August and $135,800 for merchandise purchase in month September

$\begin{array}{c}\text{Marchandise}\text{purchases}=\$113,200+\$117,200+\$135,800\\ =\$366,200\end{array}$

Working notes:

Particulars	July	August	September
Purchases	105,400	136,200	135,200
Cash payment (40%)	$42,160	$54,480	54,080
60% on the following month	0	63,240	81,720
Payment of account payable in month of July	71,100	0	0
Total	113,260	117,720	135,800
Table (3)

Calculate the purchase in the month of July,

$\begin{array}{c}\text{Purchase}=\text{Cost}\text{of}\text{goods}\text{sold}+\text{Closing}\text{inventory}-\text{Opening}\text{Inventory}\\ =\text{\$126,000}+\$41,400-\$62,000\\ =\$105,400\end{array}$

Calculate the purchase in the month of August,

$\begin{array}{c}\text{Purchase}=\text{Cost}\text{of}\text{goods}\text{sold}+\text{Closing}\text{inventory}-\text{Opening}\text{Inventory}\\ =\text{\$138000}+\$39,600-\$41,400\\ =\$136,200\end{array}$

Calculate the purchase in the month of September,

$\begin{array}{c}\text{Purchase}=\text{Cost}\text{of}\text{goods}\text{sold}+\text{Closing}\text{inventory}-\text{Opening}\text{Inventory}\\ =\$132,000+\$43,200-\$39,600\\ =\$135,600\end{array}$

3.

To determine

To prepare: Income statement of the company

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Particulars	JulyAmount ($)	AugustAmount ($)	September Amount ($)
Sales	210,000	230,000	220,000
Cost of goods sold (60%)	126,000	138,000	132,000
Gross profit	84,000	92,000	88,000
Less: Selling & Administration expense	(60,000)	(60,000)	(60,000)
Less: Depreciation	(5,000)	(5,000)	(5,000)
Less: remaining expense	(55,000)	(55,000)	(55,000)
Net profit(loss)	(36,000)	(28,000)	(32,000)
Table (4)

4.

To determine

To Prepare: Balance sheet of the company

Introduction: Budget is the evaluation of the revenue and the expense which is expected incur in the specified period.

Explanation of Solution

Balance sheetas on September 31
Assets:	Amount ($)
Cash	226,500
Account receivable	143,000
Inventory	62,000
Plant and equipment, net of depreciation	132,000
Total assets	563,500
Liability and stockholder’ equity
Account payable	232,600
Common stock	327,000
Retained earnings	3,900
Total liabilities and stockholder’s equity	563,500
Table (5)

Working notes:

Calculate the retained earnings,

$\begin{array}{c}\text{Retained}\text{earnings}=\left(\begin{array}{l}\text{Net}\text{Loss}\text{of}\text{July}+\text{Net}\text{Loss}\text{of}\text{August}\\ +\text{Net}\text{Loss}\text{of}\text{Sepember}+\text{Old}\text{retained}\text{earnings}\end{array}\right)\\ \text{=\$99,900}+\left(-\$36,000\right)+\left(-\$28,000\right)+\left(-\$32,000\right)\\ =\$3,900\end{array}$