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$14 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) February (actual) March (actual) April (budget) May (budget) 21,600 27,600 41,600 66,600 101,600 June (budget) July (budget) August (budget) September (budget) 51,600 31,600 29,600 26,600 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 $4.80 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: 4% of sales Variable: Sales commissions Fixed: Advertising Rent Salaries Utilities Insurance Depreciation $ 280,000 $ 26,000 $ 122,000 $ 11,000 $ 3,800 $ 22,000 Insurance is paid on an annual basis, in November of each year. The company plans to purchase $20,000 in new equipment during May and $48,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,000 each quarter, payable in the first month of the following quarter. The company's balance sheet as of March 31 is given below: The company's balance sheet as of March 31 is given below: $ 82,000 Assets Cash Accounts receivable ($38,640 February sales; $ 465,920 March sales) Inventory Prepaid insurance Property and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Common stock Retained earnings Total liabilities and stockholders' equity 504,560 127,872 25,000 1,030,000 $ 1,769,432 $ 108,000 21,000 960,000 680,432 $ 1,769,432 The company maintains a minimum cash balance of $58,000. 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 $58,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: 1. a. A sales budget, by month and in total. b. A schedule of expected cash collections, by month and in total. c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. d. A schedule of expected cash disbursements for merchandise purchases, by month and in total. 2. 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 $58,000. 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. 4. A budgeted balance sheet as of June 30. Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash collections, by month and in total. Earrings Unlimited Schedule of Expected Cash Collections April June May Quarter February sales March sales April sales May sales June sales Total cash collections | $ 0 $ 0 $ 0 $ Prepare a master budget for the three-month period ending June 30 that includes a schedule of expected cash disbursements for merchandise purchases, by month and in total. Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June Quarter Accounts payable April purchases May purchases June purchases Total cash payments $ $ 0 $ April May June Quarter Beginning cash balance Add collections from customers Total cash available 0 0 0 0 Less cash disbursements: Merchandise purchases Advertising Rent Salaries Commissions Utilities Equipment purchases Dividends paid Total cash disbursements Excess (deficiency) of cash available over disbursements Financing: Borrowings Repayments Interest Total financing Ending cash balance 0 0 0 0 0 0 0 0 $ $ $ $ buuyeleu NILUMNe Slalemleri For the Three Months Ended June 30 Sales Variable expenses: Cost of goods sold Commissions Contribution margin Fixed expenses: Advertising Rent Salaries Utilities Insurance Depreciation Net operating income Interest expense Net income Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash Accounts receivable Inventory Prepaid insurance Property and equipment, net Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Retained earnings Total liabilities and stockholders' egi