PART I (40 marks)

L & P Merchandising & More is a family-owned furniture store. You are the management accountant of the concern and have been given the task of preparing the cash budget for the business for the quarter ending December 31, 2020. Your data collection has yielded the following:

(i) Extracts from the sales and purchases budgets are as follows:

Month 2020

August September October November

December

Cash Sales

$121,000 $95,500 $132,680 $105,900

$216,000

Sales On Account

$480,000 $600,000 $720,000 $650,000

$800,000

Purchases On Account

$390,000 $360,000 $480,000 $400,000

$500,000

(ii) An analysis of the records shows that trade receivables (accounts receivable) are settled according to the following credit pattern, in accordance with the credit terms 5/30, n90:

60% in the month of sale

30% in the first month following the sale 10% in the second month following the sale

(iii) Accounts payable are settled as follows, in accordance with the credit terms 3/30, n60: 80% in the month in which the inventory is purchased

20% in the following month

(iv) During November, the management of L & P Merchandising expects to sell an old motor vehicle that cost $650,000 at a gain of $25,000. Accumulated depreciation on this motor vehicle at that time is expected to be $475,000. The employee will be allowed to pay a deposit equal to 40% of the selling price in November and the balance settled in four equal amounts from December 2020 to March of 2021.

(v) Computer Equipment, which is estimated to cost $480,000, will be purchased in December. The manager has made arrangements with the seller to make a cash deposit of 50% of the amount upon signing of the agreement in December, with the balance to be settled in four equal monthly instalments, starting in January 2021.

(vi) A long-term instrument purchased by L & P Merchandising with a face value of $480,000 will mature on October 20, 2020. In order to meet the financial obligations of the business, management has decided to liquidate the investment upon maturity. On that date quarterly interest computed at a rate of 412% per annum is also expected to be collected.

(vii) Fixed operating expenses which accrue evenly throughout the year, are estimated to be $2,040,000 per annum, [including depreciation on non-current assets of $35,000 per month] and are settled monthly.

(viii) Other operating expenses are expected to be $174,000 per quarter and are settled monthly.

(ix) The management of L & P Merchandising has negotiated with a tenant to rent office space to her beginning November 1. The rental is $540,000 per annum. The first months rent along with one months safety deposit is expected to be collected on November 1. Thereafter, monthly rental income becomes due at the beginning of each month.

(x) Wages and salaries are expected to be $2,940,000 per annum and will be paid monthly.

(xi) At the recently concluded negotiations between management and the union representing the workers it was agreed that L & P Merchandising should make retroactive payments in the amount of $1,520,000 to employees. The payment is being settled in four equal tranches. The third payment becomes due and payable in October of 2020.

(xii) The cash balance on December 30, 2020 is expected to be an overdraft of $198,000