Item2

Item 2 15 points

Near the end of 2019, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2019.

DIMSDALE SPORTS COMPANY

Estimated Balance Sheet

December 31, 2019

Assets

Cash$35,500

Accounts receivable520,000

Inventory100,000

Total current assets$655,500

Equipment540,000

Less: Accumulated depreciation67,500

Equipment, net472,500

Total assets$1,128,000

Liabilities and Equity

Accounts payable$355,000

Bank loan payable13,000

Taxes payable (due 3/15/2020)88,000

Total liabilities$456,000

Common stock473,000

Retained earnings199,000

Total stockholders' equity672,000

Total liabilities and equity$1,128,000

To show how to make a master budget for January, February, and March of 2020, management gathers the following information.

1. The company's single product is purchased for $20 per unit and resold for $58 per unit. The expected inventory level of 5,000 units on December 31, 2019, is more than management's desired level, which is 20% of the next month's expected sales (in units). Expected sales are January, 7,000 units; February, 9,250 units; March, 10,500 units; and April, 10,000 units.
2. Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 59% is collected in the first month after the month of sale and 41% in the second month after the month of sale. For the December 31, 2019, accounts receivable balance, $125,000 is collected in January 2020 and the remaining $395,000 is collected in February 2020.
3. Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2019, accounts payable balance, $65,000 is paid in January 2020 and the remaining $290,000 is paid in February 2020.
4. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $78,000 per year.
5. General and administrative salaries are $132,000 per year. Maintenance expense equals $2,200 per month and is paid in cash.
6. Equipment reported in the December 31, 2019, balance sheet was purchased in January 2019. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $38,400; February, $98,400; and March, $24,000. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full month's depreciation is taken for the month in which equipment is purchased.
7. The company plans to buy land at the end of March at a cost of $165,000, which will be paid with cash on the last day of the month.
8. The company 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. The company has agreed to maintain a minimum ending cash balance of $19,000 at the end of each month.
9. The income tax rate for the company is 41%. Income taxes on the first quarter's income will not be paid until April 15.

Required:

instruct on how to make a master budget for each of the first three months of 2020; include the following component budgets.

1.Monthly sales budgets.

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, 2020.