Case 8-33 (Algo) Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10] You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 21,000 June (budget) 51,000 February (actual) 27,000 July (budget) 31,000 March (actual) 41,000 August (budget) 29,000 April (budget) 66,000 September (budget) 26,000 May (budget) 101,000     The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Suppliers are paid $4.50 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below: Variable:     Sales commissions 4 % of sales Fixed:     Advertising $ 250,000   Rent $ 23,000   Salaries $ 116,000   Utilities $ 9,500   Insurance $ 3,500   Depreciation $ 19,000   Insurance is paid on an annual basis, in November of each year. The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 each quarter, payable in the first month of the following quarter. The company’s balance sheet as of March 31 is given below: Assets   Cash $ 79,000 Accounts receivable ($40,500 February sales; $492,000 March sales) 532,500 Inventory 118,800 Prepaid insurance 23,500 Property and equipment (net) 1,000,000 Total assets $ 1,753,800 Liabilities and Stockholders’ Equity   Accounts payable $ 105,000 Dividends payable 18,750 Common stock 900,000 Retained earnings 730,050 Total liabilities and stockholders’ equity $ 1,753,800 The company maintains a minimum cash balance of $55,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $55,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: A sales budget, by month and in total. A schedule of expected cash collections, by month and in total. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. A schedule of expected cash disbursements for merchandise purchases, by month and in total. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $55,000. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. A budgeted balance sheet as of June 30.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Case 8-33 (Algo) Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

The company sells many styles of earrings, but all are sold for the same price—$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual) 21,000 June (budget) 51,000
February (actual) 27,000 July (budget) 31,000
March (actual) 41,000 August (budget) 29,000
April (budget) 66,000 September (budget) 26,000
May (budget) 101,000    

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

Suppliers are paid $4.50 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.

Monthly operating expenses for the company are given below:

Variable:    
Sales commissions 4 % of sales
Fixed:    
Advertising $ 250,000  
Rent $ 23,000  
Salaries $ 116,000  
Utilities $ 9,500  
Insurance $ 3,500  
Depreciation $ 19,000  

Insurance is paid on an annual basis, in November of each year.

The company plans to purchase $18,500 in new equipment during May and $45,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $18,750 each quarter, payable in the first month of the following quarter.

The company’s balance sheet as of March 31 is given below:

Assets  
Cash $ 79,000
Accounts receivable ($40,500 February sales; $492,000 March sales) 532,500
Inventory 118,800
Prepaid insurance 23,500
Property and equipment (net) 1,000,000
Total assets $ 1,753,800
Liabilities and Stockholders’ Equity  
Accounts payable $ 105,000
Dividends payable 18,750
Common stock 900,000
Retained earnings 730,050
Total liabilities and stockholders’ equity $ 1,753,800

The company maintains a minimum cash balance of $55,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $55,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

    1. A sales budget, by month and in total.
    2. A schedule of expected cash collections, by month and in total.
    3. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
    4. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
  1. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $55,000.
  2. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
  3. A budgeted balance sheet as of June 30.
Complete this question by entering your answers in the tabs below.
Req 1A
Reg 1B
Beginning cash balance
Add collections from customers
Total cash available
Less cash disbursements:
Merchandise purchases
Advertising
Rent
Salaries
Commissions
Req 1D
Reg 2
Req 3
Prepare a master budget for the three-month period ending June 30 that includes a cash budget. Show the budget by month
and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $55,000.
Note: Cash deficiency, repayments and interest should be indicated by a minus sign.
Borrowings
Repayments
Interest
Req 1C
Total financing
Ending cash balance
Earrings Unlimited
Cash Budget
Utilities
Equipment purchases
Dividends paid
Total cash disbursements
Excess (deficiency) of cash available over disbursements
Financing:
For the Three Months Ending June 30
April
< Req 1D
S
0
0
0
0
$
May
0
0
0
0
0
Req 3 >
Req 4
$
June
0
0
0
0
0
Quarter
$
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Transcribed Image Text:Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Beginning cash balance Add collections from customers Total cash available Less cash disbursements: Merchandise purchases Advertising Rent Salaries Commissions Req 1D Reg 2 Req 3 Prepare a master budget for the three-month period ending June 30 that includes a cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $55,000. Note: Cash deficiency, repayments and interest should be indicated by a minus sign. Borrowings Repayments Interest Req 1C Total financing Ending cash balance Earrings Unlimited Cash Budget Utilities Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: For the Three Months Ending June 30 April < Req 1D S 0 0 0 0 $ May 0 0 0 0 0 Req 3 > Req 4 $ June 0 0 0 0 0 Quarter $ 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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