Joseph A. Knab distributes men's suits in the Southwest. The following information was gathered to prepare the budget for the third quarter.

• Suits are budgeted to sell for an average price of $225. Unit sales are expected to be as follows:

June .........4,000 suits

July......... 4,500 suits

August....... 4,700 suits

September...... 4,600 suits

October.......4,600 suits

• Sales are made for cash and on credit. The following collection pattern is used to estimate monthly cash collections:

Cash sales............. 41%

Credit sales—month of sale...... 35

Credit sales—month after sale.....20

Uncollectible............ 4

Total ...............100%

• The company tries to maintain an inventory of 25 percent of the following month's sales. The company expects to have 1,125 suits on hand on June 30. Knab pays an average of $146 per suit.

• The company pays for 70 percent of its purchases in the month of purchase and the remaining 30 percent in the month after purchase.

• The following monthly selling and administrative expenses are planned for the quarter, though advertising will have a one-time $30,000 increase in August.

• On September 30, the company plans to purchase $45,000 of new office equipment.
However, no additional depreciation will be recorded in the third quarter.
• Knab wants to maintain a minimum cash balance of $20,000. An open line of credit at a local bank allows the company to borrow up to $100,000 per quarter in $1,000 increments.
• All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid only when principal is repaid. The interest rate is 12 percent per year.
• Accrued expenses from the second quarter will be paid in July.
• Knab's tax rate is 30 percent.
• The June 30 balance sheet is budgeted as follows:
Cash .............$ 21,000
Accounts receivable.......180,000
Inventory ...........164,250
Plant & equipment........ 540,000
Accumulated depreciation..... (135,000)
Total assets........... $ 770,250
Accounts payable......... $ 175,000
Accrued expenses........75,000
Common stock......... 300,000
Retained earnings........ 220,250
Total liabilities and equities.... $ 770,250

Required
a. Prepare all components of Knab's master budget for the third quarter.
b. Prepare a Pro-forma income statement for the third quarter.

c. Prepare a Pro-forma balance sheet as of September30.

Transcribed Image Text:

Fixed Overhead $9,000 40,000 84,000 150,000 Variable Cost/Unit Depreciation Rent Advertising Salaries Bad debts $9.00