Chapter 7, Problem 8PSB

Near the end of 2015, the management of Isle Corp., a merchandising company, prepared the following estimated balance sheet for December 31, 2015.

ISLE CORPORATION 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. Isle Corp.’s single product is purchased for $30 per unit and resold for $45 per unit. The expected inventory level of 5,000 units on December 32,2015, is more than management’s desired level for 2016, which is 25% of the next month’s expected sales (in unit). Expected sales are: January, 6,000 units; February, 8,000 units; Match, 10,000 units; and April, 9,000 units.
2. Cash sales and credit sales represent 15% 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 $525,000 accounts receivable balance at December 31, 2015, $315,000 is collected in January 2014 and the remaining $210,000 is collected in February 2016.
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 $360,000 accounts payable balance at December 31, 2015, $72,000 is paid in January 2016 and the remaining $288,000 is paid in February 2016.
4. Sales commission equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $90,000 per year.
5. General and administrative salaries are $144,000 per year. Maintenance expense equals $3,000 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, $72,000; 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. Isle Corp. 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. Isle has agreed to maintain a minimum ending cash balance of $36,000 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 plan which predicts sales 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 manner in which capital can be assigned in best way for achieving target for sales. The aim of this budget is to curb and plan for the expenditure incurred for objective achievement with respect to sales.

Requirement 1:

Sales forecast for the first quarter of the calendar.

Answer to Problem 8PSB

Therefore, it is determined that sales forecast for quarter first is $1080000.

Explanation of Solution

Sales forecast:

It relates to the monetary plan 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.

I corporation forecast for sales
Particulars	Forecasted units	Unit value	Dollar(total)
January	6000	45	270000
February	8000	45	360000
March	10000	45	450000
first quarter total	24000		1080000

Therefore it is determined that sales forecast for quarter first is $1080000.

To determine

Concept introduction:

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

Requirement 2:

To explain:

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

Answer to Problem 8PSB

Therefore, it is determined that the commodity purchase forecast (budget) for Jan is 90000for Feb it is 255000 and for March it is 292500.

Explanation of Solution

I corporation commodity purchase forecast (budget)
Particulars	January	February	March
Forecast sales for succeeding month	8000	10000	9000
Ratio of stock to upcoming sales	*.25	*.25	*.25
Forecasted closing stock	2000	2500	2250
Add- forecasted sales	6000	8000	10000
Required available commodity	8000	10500	12250
Less-opening stock	(5000)	(2000)	(2500)
Units to be purchased	3000	8500	9750
Forecast cost per unit in $	30	30	30
Forecast commodity purchase in $	90000	255000	292500

Therefore, it is determined that the commodity purchase forecast (budget) for Jan is 90000for Feb it is 255000 and for March it is 292500.

To determine

Concept introduction:

Forecast for selling expenses relates to marketing, engineering and accounting.

Requirement 3:

Selling expenses forecast for the first quarter of the calendar.

Answer to Problem 8PSB

Hence, it is determined that selling expenses forecast for Jan is $61500, for Feb it is $79500 and for March it is $97500.

Explanation of Solution

Forecast for selling expenses relates to sales, marketing, engineering and accounting.

So computation of selling expenses forecast is given below.

I corporation selling expenses forecast
Particulars	January	February	March
Forecasted sales	270000	360000	450000
Commission percentage sales	*.20	*.20	*.20
Expenses related to sales commission	54000	72000	90000
Salaries of sales	7500	7500	7500
Selling expenses in total	$61500	$79500	$97500

Hence, it is determined that selling expenses forecast for Jan is $61500, for Feb it is $79500 and for March it is $97500.

To determine

Concept introduction:

Administrative and general expenditure forecast relates to those expenditure that are made for running of the company i.e. rent, utilities and insurance. It does not include expenditure that are in relation to manufacturing of the commodity and services.

Requirement 4:

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

Answer to Problem 8PSB

Hence, it is determined that administrative and general expenses forecast for Jan is $21375, for Feb it is $22375 and for March it is $22675.

Explanation of Solution

Administrative and general expenditure forecast relates to administrative expenditure ex- rent, utilities and insurance.

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

I corporation administrative and general expenses forecast
Particulars	January	February	march
Salaries	12000	12000	12000
Maintenance	3000	3000	3000
Depreciation	6375	7375	7675
Expenses total	$21375	$22375	$22675

Hence, it is determined that administrative and general expenses forecast for Jan is $21375, for Feb it is $22375 and for March it is $22675.

To determine

Concept introduction:

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

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

Answer to Problem 8PSB

Hence, it is determined that Capital expenditure forecast (budget) for the months; Jan, Feb and March are: $72000, $96000 and $178800.

Explanation of Solution

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

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

I corporation Capital expenditure forecast (budget)
Particulars	January	February	March
Equipment purchased	72000	96000	28800
Land purchase	-	-	150000
Total	72000	96000	178800

Hence, it is determined that Capital expenditure forecast (budgets) for the months; Jan, Feb and March are: $72000, $96000 and $178800.

To determine

Concept introduction:

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

Cash forecast for the first quarter of the calendar.

Answer to Problem 8PSB

Therefore, the closing balance for January $182850, for February $107850 and for March is $36000.

Explanation of Solution

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

So, computation of cash received forecast is given below.

Supporting calculation
Particulars	January	February	March
Total sales	270000	360000	450000
Cash sales (25%)	67500	90000	112500
Amount due from last month(75%of credit sales)	202500	270000	337500
Cash collection
Amount to received at 31/12/16	315000	210000
Month after sale (60%)		121500	81000
First month (40%)			162000
Credit from customer	315000	331500	243000
Cash sales	67500	90000	112500
Total cash received	382500	421500	355500
Supporting calculation	January	February	March
Purchases on credit	90000	255000	292500
Amount to be paid	72000	288000
Month after purchase (20%)		18000	72000
First month (80%)			51000
Total on purchase	72000	306000	123000
I corporation cash budget	January	February	March
Opening cash balance	36000	182850	107850
Cash received from customer	382500	421500	355500
Available cash	418500	604350	463350
Disposal of cash
Payment for commodity	72000	306000	123000
Commissions on sales	54000	72000	90000
Salaries sales	7500	7500	7500
Administrative and salaries	12000	12000	12000
Expenses for maintenance	3000	3000	3000
Interest (15000*1%)	150
Tax payable			90000
Purchase of equipment	72000	96000	28800
Purchase of land			150000
Total cash disposal	220650	496500	504300
Cash balance preliminary	197850	107850	(40950)
Bank loan payment	(15000)
Closing balance of cash	182850	107850	36000

Therefore, the closing balance for the months; January, Feb and March are; $182850, $107850 and $36000.

To determine

Concept introduction:

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

Forecasted income statement for the entire first quarter.

Answer to Problem 8PSB

Hence, it is determined that net revenue for first quarter is $32955.

Explanation of Solution

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

So, computation of income statement forecast is given below.

I corporation forecasted income statement
sales		$1080000
Cost of goods sold(COGS)(24000*$30)		720000
Gross profit		360000
Running expenses
Commission on sales	216000
Salaries	22500
Administrative & general salaries	36000
Maintenance expenses	9000
Depreciation	21425
Interest expenses	150	305075
Before tax income		54925
Tax (54925*40%)		21970
Net revenue		32955

Hence, it is determined that net revenue for first quarter is $32955.

To determine

Concept introduction:

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

Requirement 8:

Financial statement for the entire first quarter.

Answer to Problem 8PSB

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 that help in summarizing assets, liabilities and equity of the company held by shareholders at point of time.

So, computation of Financial statement forecast is given below.

DS company forecasted income statement
Asset
Cash		36000
Amount due		445500
Raw material stock		67500
Total current asset		549000
Land		150000
Equipment	736800
Less-depreciation	88925	647875
Total of asset		$1346875
Liabilities and equities
Account to be paid		496500
Bank loan		76950
Taxes		21970
Total of liabilities		595420
Common inventory	472500
Retained income	278955
Total equity shareholder		751455
Total equity and liabilities		1346875

Hence, it is determined that total asset and liabilities is $1346875.

Working notes

Accounts	Amount due		Stock
Opening due	525000		Opening stock	150000
Credit sales	810000		Purchases	637500
Less-amount collected	889500		Less-cost of goods sold(COGS)	720000
Closing dues	445500		Closing stock	67500
Equipment			Depreciation
Opening equipment	540000		Opening accumulated depreciation	67500
Purchase in January	72000		Depreciation expenses	21425
Purchase in February	96000		Total	88925
Purchase in march	28800
Total	736800

Amount to be paid

Retained earning

Opening amount to be paid

$360000

Opening retained earning

246000

Purchases

637500

Net income

32955

Payments

501000

Total

$278955

Ending amount to be paid

$549600