Part 1

Always aspiring to be an entrepreneur, you finally believe you may have found your niche.

While you were polishing off the last of the brownie mix your sister gave you for the holidays last year, you realized that it was the only homemade gift you had gotten for quite some time, and further realized that you had never given a gift made with your own hands. Justifying your absence of creativity to a lack of time, it comes to you that perhaps there would be a market for handmade goodies that people could simply purchase off the shelf and give as special gifts.

You brainstorm with your two roommates and come together with a plan to prepare for the birth of SABCO, Inc., a name created as an abbreviation for Sand Art Brownie Company.

It is early April 2021, and the three of you research the holiday market and decide that all products to be sold for the holiday season must be ready to ship to retailers by October 1, 2021. This will allow the three of you to spend the remainder of the year processing orders.

The three of you determine the following:

1. Each of you will contribute $15,000 on July 1, 2021 (borrowed from relatives) to form a corporation. You realize that another form of business may be less expensive but know that this is just the beginning of a wildly successful business and want to go ahead right away with the incorporation of the business. The par value of the stock is $1.00 and each of you purchase 5,000 shares of stock.
2. You estimate that you can sell the brownies for $15 per container. You believe this price will make the product attractive enough to sell 100,000 containers of product for the 2021 holiday season. All the shareholders agree this would be a competitive price and a fine start to your business.
3. Fifty percent of sales are expected to be taken online and paid by credit card immediately upon ordering. The bank charges a credit card fee of 2% of the transaction. This is considered a selling expense. The other 50% of sales will be sold to a wholesaler who will purchase in bulk at $13.50 per container. They will pay 60% at time of delivery and the remaining 40% will be collected the following month.
4. Your roommate gets to work on building a great website and lays the groundwork to get your website to pop-up based on several appropriate key-word searches such as holiday gifts and brownies. Her hard work results in a one-time website fee of $10,500 in July, and $100 per month in maintenance fees from July December 2021. These costs are not capitalized but expensed immediately because you are sure that the website will have to be completely revamped after the holiday to gear up for the future.
5. Factory space will be rented for a period of five months (July, August, September, October, and November) at $800 per month for production of the Sand Art Brownies. Utilities for the space are estimated to be $300 each month which you are also responsible for per the lease agreement. After the five months of production, the equipment will be stored in your garage, until the next holiday production rush. Due to the perishability of your product, your production must also be seasonal.
6. Equipment required to run the factory is needed up front and will cost $18,000. The equipment will be depreciated over 5 years under the straight-line method. The salvage value will be negligible.
7. Each day, after production, the finished product will be shipped to a fulfillment house that will store the containers until they are shipped. The rent for the agreed upon space at the fulfillment house is $2,500 per month. The rental agreement is for July through December 2021. Included in this fee are order processing charges and shipping and handling fees. Minimal returns after the holiday season are expected, but a return policy on the website instructs customers to ship returned items to your home.
8. A small office will be rented downtown to handle administrative issues, field sales calls, and process online orders. The rent for this space is $250 per month and is leased from July December 2021. Utilities are included in the rent.
9. All bills will be paid immediately with cash, as you suspect credit will not be established early on by your suppliers and this will be the most conservative approach in estimating your cash needs.
10. Each of you will take a salary per month of $3,000. These three salaries will be the only salaries besides the direct labor and factory overhead personnel. (The tax consequences of these salaries will be ignored in this project).
11. To be conservative, you expect to sell the same number of containers each week for 8 weeks (4 weeks in November and 4 weeks in December). You only have capacity to produce 6,000 containers in a week and you want to have at least two weeks of inventory on hand in advance of any sales. Additionally, you would like to run your production at maximum capacity in July, August and September, prior to sales beginning to allow for the unexpected. You only produce enough in October and November to have the expected two weeks of inventory on hand. For simplicity, assume there are four production weeks per month.
12. To make sure that there will be enough product for production, all materials are purchased ahead of production. You decide that after the first month you would like to have enough materials for the first two weeks of production on hand at the end of the preceding month.
13. You know that you will not have enough money to finance the operation until the money from the sales starts to come in. You are in the process of putting together a business plan to include the following for the period from July through December 2021:
    1. Direct labor worksheet
    2. Factory Overhead Worksheet
    3. Job Cost Detail
    4. Production Budget
    5. Direct Materials Budget
    6. Direct Labor Budget
    7. Selling and Administrative Expense Budget
    8. Cash Budget
    9. Budgeted Financial Statements

You mean to provide the business plan to the bank. You expect they will grant you a line of credit to make up your cash shortfalls through the end of the selling season. You will be applying for a line of credit that you can access at the beginning of each month to meet your cash flow needs. Because you are only allowed to draw on your line once a month, you decide that you would like to maintain a cash balance at the end of the month equal to your required purchases the subsequent month. You will make one lump payment at the end of December to pay off your borrowings plus interest at the rate of 6%. Simple interest is accrued and paid at the end of the year.

14. The three shareholders feel comfortable with the plan outlined above; however, no cost studies have been done on the product to determine the cost of sales for each container. The information you do have is a recipe jotted down on the back of a napkin that your sister scrawled out when you asked her for the recipe. The napkin reads as shown in Figure 1.
15. You plan to use a job cost system to capture the costs per batch. A job cost system is chosen over a different cost system because you and your business partners expect the same machinery and production lines will be used for off-season products in 2021 and beyond. Those products are yet to be determined.

10. Use the journal entry and T-account templates (Table A11 and A12 respectively), complete the information for July to project financial information for July. Reference your postings with the journal entry number. You will have to post all entries in order to complete the budgeted financial statements (Table A13), discussed next. The July journal entries have been provided for you. You may need to delete entries and/or add entries to other months depending on the transactions that occur.

11. Put the resulting balances from step 5 into the Financial Statement Projections template (Table A13). Important: Make sure the balance sheet section of this template balances before moving on to the next month. Do just one month at a time to assure that errors are caught before continuing to the next month. This is very important for this project. You are not required to do closing entries.

12. Repeat step 10 and 11 for August through December, to produce the Financial Projections you will need to secure financing. Make sure you start with the beginning balances in your balance sheet accounts, assuming the closing process has been done from one month to the next. The Income Statement accounts will have been closed, so there is no beginning balance, and the Retained Earnings is updated. Note: You will be using a copy of Table 11 and Table 12 six times for each month, July December. Remember that you may need to add or delete entries in subsequent months depending on the transactions that occurred.

SABco, Inc. JOURNAL ENTRIES July Date Description Debit Credit Ref 7/1/2021 1 CHECKING COMMON STOCK ADDITIONAL PAID-IN CAPITAL Toreesdratne canviar 7/1/2021 2 CASH LINE OF CREDIT PAYABLE Toreovddawanie owed 7/31/2021 3 ADMINISTRATIVE SALARIES FULLFILLMENT HOUSE EXPENSE INTERNET EXPENSE OFFICE RENT CASH Telected seling and administrative Apenses 7/31/2021 4 EQUIPMENT CASH To revdevotiased event 7/31/2021 5 MANUFACTURING OVERHEAD ACCUMULATED DEPRECIATION Forevd deveciais 7/31/2021 6 MATERIAL INVENTORY CASH To record material muetases #4444 7/31/2021 WORK IN PROCESS CASH Toreo d'aver lancy 7 7/31/2021 8 WORK IN PROCESS MATERIAL INVENTORY Toread' deo malerials used' 7/31/2021 9 MANUFACTURING OVERHEAD MANUFACTURING OVERHEAD MANUFACTURING OVERHEAD CASH Toreccd'haver lanco, facralent and wires 7/31/2021 10 FINISHED GOODS INVENTORY MANUFACTURING OVERHEAD WORK IN PROCESS ToreovdAnished goods Check Figure 1,263,924.00 1263,924.00 Table A12 ref 1430 WORK IN PROCESS ref COST OF GOODS 5000 SOLD ref 3000 COMMON STOCK ref ref ref ref 6010 INTERNET EXPENSE ref ef 1010 CASH ref 15,000 45,000 T TB TB 15,000 (15,000) T TB T TB - FINISHED GOODS 1450 INVENTORY ADMINISTRATIVE 6000 SALARIES ref ref ref 3100 ADDITIONAL PAID-IN CAPITAL ref 30,000 ref refref 6012 OFFICE RENT ref 45,000 B (45,000) ACCOUNTS 1200 RECEIVABLE ef ref T TB T TB 30,000 (30,000) T TB T TB ref 1640 EQUIPMENT ref ref 3900 RETAINED EARNINGS FULLFILLMENT 6004 HOUSE EXPENSE ref ref refref 7000 DEPRECIATION ref ef 1400 MATERIAL INVENTORY ref T TE T TB T TB T TB ACCUMULATED 1700 DEPRECIATION ref ref ref 4000 PRODUCT SALES ref CREDIT CARD 6005 EXPENSE ref refref 7020 INTEREST EXPENSE ref B ef MANUFACTURING 1425 OVERHEAD ref T TE I T TB T TB T TB - LINE OF CREDIT 2400 PAYABLE ref ret B SABco, Inc. JOURNAL ENTRIES July Date Description Debit Credit Ref 7/1/2021 1 CHECKING COMMON STOCK ADDITIONAL PAID-IN CAPITAL Toreesdratne canviar 7/1/2021 2 CASH LINE OF CREDIT PAYABLE Toreovddawanie owed 7/31/2021 3 ADMINISTRATIVE SALARIES FULLFILLMENT HOUSE EXPENSE INTERNET EXPENSE OFFICE RENT CASH Telected seling and administrative Apenses 7/31/2021 4 EQUIPMENT CASH To revdevotiased event 7/31/2021 5 MANUFACTURING OVERHEAD ACCUMULATED DEPRECIATION Forevd deveciais 7/31/2021 6 MATERIAL INVENTORY CASH To record material muetases #4444 7/31/2021 WORK IN PROCESS CASH Toreo d'aver lancy 7 7/31/2021 8 WORK IN PROCESS MATERIAL INVENTORY Toread' deo malerials used' 7/31/2021 9 MANUFACTURING OVERHEAD MANUFACTURING OVERHEAD MANUFACTURING OVERHEAD CASH Toreccd'haver lanco, facralent and wires 7/31/2021 10 FINISHED GOODS INVENTORY MANUFACTURING OVERHEAD WORK IN PROCESS ToreovdAnished goods Check Figure 1,263,924.00 1263,924.00 Table A12 ref 1430 WORK IN PROCESS ref COST OF GOODS 5000 SOLD ref 3000 COMMON STOCK ref ref ref ref 6010 INTERNET EXPENSE ref ef 1010 CASH ref 15,000 45,000 T TB TB 15,000 (15,000) T TB T TB - FINISHED GOODS 1450 INVENTORY ADMINISTRATIVE 6000 SALARIES ref ref ref 3100 ADDITIONAL PAID-IN CAPITAL ref 30,000 ref refref 6012 OFFICE RENT ref 45,000 B (45,000) ACCOUNTS 1200 RECEIVABLE ef ref T TB T TB 30,000 (30,000) T TB T TB ref 1640 EQUIPMENT ref ref 3900 RETAINED EARNINGS FULLFILLMENT 6004 HOUSE EXPENSE ref ref refref 7000 DEPRECIATION ref ef 1400 MATERIAL INVENTORY ref T TE T TB T TB T TB ACCUMULATED 1700 DEPRECIATION ref ref ref 4000 PRODUCT SALES ref CREDIT CARD 6005 EXPENSE ref refref 7020 INTEREST EXPENSE ref B ef MANUFACTURING 1425 OVERHEAD ref T TE I T TB T TB T TB - LINE OF CREDIT 2400 PAYABLE ref ret B