Chapter 22, Problem 8AP

1.

To determine

Prepare monthly sales budgets for each of the first three months of 2016.

Explanation of Solution

Sales Budget: The sales budget is the budget prepared to estimate the revenue, the expected number of units to be sold and the expected selling price for each product. The sales budget is the first step for an operating budget and the basis for the production and cost of goods sold budget.

Prepare monthly sales budgets for each of the first three months of 2016:

Company DS
Sales Budgets
January, February, and March 2016
	Budgeted Units	Budgeted Unit Price	Budgeted Total Dollars
January 2016	7,000	$55	$ 385,000
February 2016	9,000	55	495,000
March 2016	11,000	55	605,000
Total for the first quarter	27,000		$1,485,000

Table (1)

Conclusion

Therefore, the total estimated sales units and dollar amount for the first quarter is 27,000 units and $1,485,000.

2.

To determine

Prepare monthly merchandise purchases budgets for each of the first three months of 2016.

Explanation of Solution

Purchases budget: This budget shows the expected purchase requirement for the budgeted period.

Prepare monthly merchandise purchases budgets for each of the first three months of 2016:

Company DS
Merchandise Purchases Budgets
January, February, and March 2016
	January	February	March	Total
Next month’s budgeted sales	9,000	11,000	10,000
Ratio of inventory to future sales	× 20%	×  20%	× 20%
Budgeted ending inventory	1,800	2,200	2,000
Add: Budgeted sales	7,000	9,000	11,000
Required available merchandise	8,800	11,200	13,000
Less: Beginning inventory	(5,000)	(1,800)	(2,200)
Units to be purchased	3,800	9,400	10,800	24,000
Budgeted cost per unit	$30	$30	$30	$30
Budgeted merchandise purchases	$114,000	$282,000	$324,000	$720,000

Table (2)

Conclusion

Therefore, the total estimated purchase units and dollar amount for the first quarter is 24,000 units and $720,000.

3.

To determine

Prepare monthly selling expense budgets for each of the first three months of 2016.

Explanation of Solution

Selling expense budget: This budget shows the estimated selling expenses for the budgeted period.

Prepare monthly selling expense budgets for each of the first three months of 2016:

Company DS
Selling Expense Budgets
January, February, and March 2016
	January	February	March	Total
Budgeted sales	$385,000	$495,000	$605,000
Sales commission percent	× 20%	× 20%	× 20%
Sales commissions expense	77,000	99,000	121,000	$297,000
Sales salaries	5,000	5,000	5,000	15,000
Total selling expenses	$ 82,000	$104,000	$126,000	$312,000

Table (3)

Conclusion

Therefore, the total budgeted selling expense budget for the first quarter is $312,000.

4.

To determine

Prepare monthly general and administrative expense budgets for each of the first three months of 2016.

Explanation of Solution

General and administrative expense budget: This budget shows the estimated General and administrative expenses for the budgeted period.

Prepare monthly general and administrative expense budgets for each of the first three months of 2016:

Company DS
General and Administrative Expense Budgets
January, February, and March 2016
	January	February	March	Total
Salaries	$12,000	$12,000	$12,000	$36,000
Maintenance	2,000	2,000	2,000	6,000
Depreciation (Working note 1)	6,000	7,000	7,300	20,300
Total expenses	$20,000	$21,000	$21,300	$62,300

Table (4)

Working note 1: Compute the depreciation expense for each month,

	Annual Amount	January	February	March	Total
Equipment owned on 12/31/2015	$67,500	$5,625	$5,625	$5,625	$16,875
Purchased in January	4,500	375	375	375	1,125
Purchased in February	12,000	0	1,000	1,000	2,000
Purchased in March	3,600	0	0	300	300
Totals		$6,000	$7,000	$7,300	$20,300

Table (5)

Conclusion

Therefore, the total budgeted general and administrative expense for the first quarter is $62,300.

5.

To determine

Prepare monthly capital expenditure budgets for each of the first three months of 2016.

Explanation of Solution

Capital expenditure budget: Capital expenditure budget is reports the dollar amounts expected to be spent on the purchase of additional assets like plant, machinery which are used to carry the budgeted business activities.

Prepare monthly capital expenditure budgets for each of the first three months of 2016:

Company DS
Capital Expenditures Budgets
January, February, and March 2016
	January	February	March
Equipment purchases	$36,000	$96,000	$28,800
Land purchase	______	______	150,000
Total	$36,000	$96,000	$178,800

Table (6)

Conclusion

Therefore, the total budgeted capital expenditure for the months January, February, and March are $36,000, $96,000, and $178,800 respectively.

6.

To determine

Prepare monthly cash budgets for each of the first three months of 2016.

Explanation of Solution

Cash budget: This budget shows the total budgeted cash receipts and cash disbursements for the budgeted period.

Prepare monthly cash budgets for each of the first three months of 2016

Company DS
Cash Budgets
January, February, and March 2016
	January	February	March
Beginning cash balance	$  36,000	$ 30,100	$210,300
Cash receipts from customers (Working note 2)	221,250	697,000	489,500
Total cash available (A)	257,250	727,100	699,800
Cash disbursements:
Payments for merchandise (Working note 3)	80,000	302,800	147,600
Sales commissions	77,000	99,000	121,000
Sales salaries	5,000	5,000	5,000
General & administrative salaries	12,000	12,000	12,000
Maintenance expense	2,000	2,000	2,000
Interest ($15,000 x 1%)	150	0	0
Taxes payable	0	0	90,000
Purchases of equipment	36,000	96,000	28,800
Purchase of land	0	0	150,000
Total cash disbursements (B)	212,150	516,800	556,400
Preliminary cash balance $\left(\text{A}\right)\text{–}\left(\text{B}\right)$	45,100	210,300	143,400
Repayment of loan to bank	(15,000)	_______	________
Ending cash balance	$ 30,100	$210,300	$143,400
Loan balance, end of month	$0	$0	$0

Table (7)

Working note 2: Compute the cash receipts from customers:

	January		February		March		Total
Total sales	$385,000		$495,000		$605,000		$1,485,000
Cash sales (25%)	96,250		123,750		151,250		371,250
Credit sales (75%)	288,750		371,250		453,750		1,113,750
Cash collections:
Receivables at 12/31/2015	$125,000		$400,000		0		$525,000
Month after sale (60%)	0		173,250		$222,750		396,000
Second month (40%)	0		0		115,500		115,500
Total from credit customers	125,000		573,250		338,250		1,036,500
Cash sales	96,250		123,750		151,250		371,250
Total cash received	$221,250	$697,000		$489,500		$1,407,750

Table (8)

Working note 3: Compute the cash payments for merchandise:

	January		February	March	Total
Credit purchases	$114,000	$282,000		$324,000	$720,000
Accounts payables at 12/31/2015	$ 80,000	$280,000		0	$360,000
Month after purchase (20%)	0	22,800		$ 56,400	79,200
Second month (80%)	0	0		91,200	91,200
Total paid on purchases	$80,000	$302,800		$147,600	$530,400

Table (9)

7.

To determine

Prepare a budgeted income statement for the entire first quarter.

Explanation of Solution

Budgeted income statement: The budgeted financial statement which reports the budgeted revenues and expenses from business operations and the result of those operations as net income or net loss for a budgeted period is referred to as budgeted income statement.

Prepare a budgeted income statement for the entire first quarter:

Company DS
Budgeted Income Statement
For Three Months Ended March 31, 2016
	Amount ($)	Amount ($)
Sales		$1,485,000
Cost of goods sold (27,000 units @ $30)		810,000
Gross profit		675,000
Operating expenses:
Sales commissions	$297,000
Sales salaries	15,000
General administrative salaries	36,000
Maintenance expense	6,000
Depreciation expense	20,300
Interest expense	150	374,450
Income before taxes		300,550
Income taxes (40%)		120,220
Net income		$180,330

Table (10)

Conclusion

Therefore, the budgeted net profit for the first quarter is $180,330.

8.

To determine

Prepare a budgeted balance sheet as of March 31, 2016.

Explanation of Solution

Budgeted Balance Sheet: Budgeted Balance Sheet is one of the budgeted financial statements which summarize the budgeted assets, the liabilities, and the Shareholder’s equity of a company at a given date.

Prepare a budgeted balance sheet as of March 31, 2016:

Company DS
Budgeted Balance Sheet
March 31, 2016
Assets
Cash (Cash budget)		$  143,400
Accounts receivable (Working note 4)		602,250
Inventory (Working note 5)		60,000
Total current assets		805,650
Land (Capital budget)		150,000
Equipment (Working note 6)	$700,800
Less accumulated depreciation (Working note 7)	87,800	613,000
Total assets		$1,568,650
Liabilities and Equity
Accounts payable (Working note 8)		$   549,600
Bank loan payable (cash budget)		0
Taxes payable (due 4/15/2016) (Income statement)		120,220
Total liabilities		669,820
Common stock (Unchanged)	$472,500
Retained earnings (Working note 9)	426,330
Total stockholders’ equity		898,830
Total liabilities and equity		$1,568,650

Table (11)

Working notes:

Working note 4: compute ending receivables
Beginning receivables	$525,000
Credit sales	1,113,750
Less collections	(1,036,500)
Ending receivables	$602,250
Working note 5: Compute the ending inventory
Beginning inventory	$150,000
Purchases	720,000
Less: Cost of goods sold	(810,000)
Ending inventory (2,000 units × $30)	$60,000
Working note 6: Compute the equipment balance
Beginning equipment	$540,000
Purchased in January	36,000
Purchased in February	96,000
Purchased in March	28,800
Equipment as on March 31	$700,800
Working note 7: compute the accumulated depreciation
Beginning accumulated depreciation	$67,500
Depreciation expense	20,300
Accumulated depreciation as on March 31	$87,800
Working note 8: Compute the accounts payable as on March 31
Beginning accounts payable	$360,000
Purchases	720,000
Payments	(530,400)
Accounts payable as on March 31	$549,600
Working note 8: Compute the retained earnings as on March 31
Beginning retained earnings	$246,000
Net income	180,330
Retained earnings as on March 31	$426,330

Table (12)