Problem 20-8AA Merchandising: Preparation of a complete master budget LO P4 Near the end of 2017, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2017. DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2017 Assets Cash $ 35,500 Accounts receivable 520,000 Inventory 100,000 Total current assets $ 655,500 Equipment 528,000 Less: accumulated depreciation 66,000 Equipment, net 462,000 Total assets $1,117,500 Liabilities and Equity Accounts payable $ 375,000 Bank loan payable 14,000 Taxes payable (due 3/15/2018) 90,000 Total liabilities $ 479,000 Common stock 471,500 Retained earnings 167,000 Total stockholders' equity 638,500 Total liabilities and equity $1,117,500 To prepare a master budget for January, February, and March of 2018, management gathers the following information. a. The company's single product is purchased for $20 per unit and resold for $55 per unit. The expected inventory level of 5,000 units on December 31, 2017, is more than management's desired level, which is 20% of the next month's expected sales (in units). Expected sales are: January 7,250 units; February, 8,500 units; March, 10,750 units, and April, 10,500 units. b. Cash sales and credit sales represent 20% and 80%, respectively, of total sales. Of the credit sales, 59% is collected in the first mond after the month of sale and 41% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $130,000 is collected in January and the remaining $390,000 is collected in February c. 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, 2017, accounts payable balance, $80,000 is paid in January and the remaining $295,000 is paid in February d. Sales commissions equal I to 20% of sales are paid each month. Sales salaries (excluding commissions) are $72,000 per year. e. General and administrative salaries are $144,000 per year. Maintenance expense equals $2,200 per month and is paid in cash. f. Equipment reported in the December 31, 2017, balance sheet was purchased in January 2017. 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, $96,000; and March, $19,200. 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. surchased g. The company plans to buy land at the end of March at a cost of $170,000, which will be paid with cash on the last day of the month. h. 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 minimum ending cash balance of $12,760 at the end of each month. i. 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: Prepare a master budget for each of the first three months of 2018; 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, 2018. Calculation of Cash receipts from customers: January February March Sales in units Selling price per unit Total budgeted sales Cash sales 20% Sales on credit -Collected in--- March 31 Total January March Receivable $ 520.000 $ 130,000 $ 390,000 Accounts Receivable - January 1 Credit sales from: January February March Total collection of receivables $ 130,000 Total cash receipts from customers January February March Collections of receivables Calculation of payments for merchandise: January February March Desired ending inventory (units) Budgeted sales in units Total units required Beginning inventory (units) Number of units to be purchased Cost per unit Total cost of purchases March 31 Payable Total --Paid in--------------- February March $ 295,000 January $ 80,000 $ 375,000 Accounts Payable - January 1 Merchandise purchases in: January February March Total cash paid for merchandise $ 80,000 DIMSDALE SPORTS CO. Cash Budget January, February, and March 2018 January February March Beginning cash balance Total cash available Cash payments for: Total cash payments Preliminary cash balance Ending cash balance Loan balance January February March Loan balance - Beginning of month Additional loan (loan repayment) Loan balance - End of month DIMSDALE SPORTS CO. Budgeted Income Statement For Three Months Ended March 31, 2018 Operating expenses Total operating expenses DIMSDALE SPORTS CO. Budgeted Balance Sheet March 31, 2018 Assets Total current assets Equipment, net Total assets Liabilities and Equity Liabilities Bank loan payable Total liabilities Stockholders' Equity Total Stockholders' Equity Total Liabilities and Equity