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Case 8-31 Master Budget with Supporting Schedules [LO8-2, LO8-4, L08-8, LO8-9, LO8-10] You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earings to various retail outlets located in shopping mal's across the country. In the past, the company has done very itte 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 comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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 -518 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) Apn (budget) May (budget) 22,000 June (budget) 28,000 Juty (budget) 42,000 August (budge 87,000 September (budget) 02,000 52,000 0,000 27,000 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 $5 for a pair of earings. 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, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 7 %iso lected in the following month, and the remaining 10% s collected in the second month following sale. Bad detts have been negligible. Monthly operating expenses for the company are given below. Variable Sales c 4% of sales Fixed: Rent Salaries Utlities Insurance 5 300,000 S 28,000 5126,000 S 12,000 S 4,000 S 24,000 insurance is paid on an annual basis, in Nowember of each year The company plans to purchase 521,000 in new equipment during May and $50,000 in new equipmen: during June; both purchases will be for cash. The company declares dividends of 522,500 each quarter payable in the first month of the following quarter A isting of the company's ledger accounts as of March 31 is given below. Assets Cash S 84,000 Accounts receivable (S44,800 February sales 8537,800 March sales) 582,400 134,000 Prepaid insurance Property and equipment (net) Total assets 5 1,878,400 Liabilities and Stockholders Equity Accounts payabla Dividends payable Common stock Retained earnings S 110,000 22,500 Total liab ties and stockholders equity S 1,878,400 The company maintains a minimum cash balance of S80,000. 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 S1,00D), while stil retaining at least 580,000 in cash. Required: 1. Prepare a master budget for the three-month period ending June 30. Include the fol lowing detailed budgets. 2. A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.) Answer is complete but not entirely correct. Cash Budget For the Three Months Ending June 30 Apri 84,000 80,720 5 244,940 84,000 729,800 1,144,0001,41,0003,289,800 813,600 June Beginning cash balance Total cash avalable 1,204,720 1,880,940 3,373,600 Less cash disbursements (312,500)(407,500315,000)1,035,000) (300,000)(300,000)(300,000)(900,000) (23,000) (23,000) (23,000) (84,000) (128,000)(128,000)12,000)(378,000) (42,880) (85,280) (33,280 (141,440) (12,000) (12,000) (12,0038,000) Merchandise purchases Rent Salaries Utilties 001 (21,000) (50,000) (71,000) (22,500) Dividends paid Total cash disbursements (843,880) 959,780) (84,280)(2,887,94D) cash avaable over (30,280)244,94D 796,880 705,880 disbursements Financing Borrowngs 91,000 91,000 (1,000) (91,000) Interest Total financing Ending cash balance 1,000 5 60,720 2,730 702,930 5 702,930 (2,730) 93,730 244,940 3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach. Answer is complete but not entirely correct. Earrings U Budgeted Income Statement For the Three Months Ended June 30 Sales $3,538,000 Variable expenses 1,105,000 141,440 Cost of goods sold 1,248,440 2,289,580 Contribution margin Fixed expenses Advertising Rent Salaries Utilties 00,000 84,000 378,000 01 36,000 2 12,000 72,000 Depreciation 1,482,000 07,560 Net operating income Interest expense Net income 07,580 4. A budgeted balance sheet as of June 30. 3 Answer is not complete. Budgeted Balance Sheet June 30 Assets 702,930 828,800 64,000 14,000 1,049,000 Cash Accounts receivable Prepaid insurance Property and equipment, net Total assets Liabilities and Stockholders' Equity Accounts payable, purchases Common stock Retained earnings 110,000 1,000,000 743,900 otal liabilities and stockholders