I have figured most of below out. However, I have TWO specific questions.

1) How do I handle the 20% taxes?

2) How do I handle the amount in A/P on the balance sheet?

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$10 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)	20,000	June (budget)	50,000
February (actual)	26,000	July (budget)	30,000
March (actual)	40,000	August (budget)	28,000
April (budget)	65,000	September (budget)	25,000
May (budget)	100,000

The concentration of sales before and during May is due to Mothers 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 for a pair of earrings. All purchases of inventory are paid in the same month.Half of sales are on cash and the other half on credit. Only 20% of a months credit sales are collected in the month of sale. Credit customers who pay in the same month get 3% discount. An additional 70% is collected in the following month, and 8% is collected in the second month following sale. Bad debts have been 2% of credit sales.

Monthly operating expenses for the company are given below:

Variable:
Sales commissions		4	% of sales
Fixed:
Advertising	$	200,000
Rent	$	18,000
Salaries	$	106,000
Utilities	$	7,000
Insurance	$	3,000
Depreciation	$	14,000

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

The company plans to purchase $56,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. All Income tax will be paid in the next quarter. Income tax rate is 20%.

The companys balance sheet as of March 31 is given below:

Assets
Cash	$	74,000
Accounts receivable (net of allowance)		166400
Inventory (26000 units)		104,000
Prepaid insurance		21,000
Property and equipment (net)		1033200
Total assets	$	1,398600
Liabilities and Stockholders Equity
Accounts payable	$	100,000
Dividends payable		15,000
Common stock		703600
Retained earnings		580,000
Total liabilities and stockholders equity	$	1,398600

The company maintains a minimum cash balance of $50,000. 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 $50,000 in cash.

Company uses FIFO method of inventory costing.

Required:

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

1. a. A sales budget, in units and in Revenue, by month and in total.

b. A schedule of expected cash collections, from sales and from accounts receivables 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.

e. A schedule of cash payments for other expenses, 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 $50,000.

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.