Problem 20-8BA Merchandising: Preparation of a complete master budget P4 Near the end of 2017, the management of Isle Corp., a merchandising company, prepared the following estimated balance sheet for December 31, 2017 ISLE CORPORATION Estimated Balance Sheet December 31, 2017 Liabilities and Equity Assets Cash Accounts receivable Inventory Total current assets Accounts payable Bank loan payable Taxes payable (due 3/15/2018) $ 36,000 525,000 150,000 $360,000 15,000 _90,000 $ 711,00o Total liabilities 465,000 Equipment Less: Accumulated depreciation 67,500 Common stock 540,00o 472,50o Retained earnings 246,000 Equipment, net 472,50o Total stockholders' equity $1,183,500 Total liabilities and equity 718,500 S1,183,500 Total assets a. The company's single product is purchased for $30 per unit and resold for $45 per unit. The expected inventory level of 5,0o0 units on December 31, 2017, is more than management's desired level for 2018, which is 25% of the next month's expected sales (in units) Expected sales are: January, 6,000 units; February, 8,000 units; March, 10,ooo units; and April, 9,000 units. b. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% in the second month after the month of sale. For the $525,000 accounts receivable balance at December 31, 2017, $315,000 is collected in January 2018 and the remaining $210,000 is collected in February 2018. 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 $360,000 accounts payable balance at December 31, 2017, $72,000 is paid in January 2018 and the remaining $288,000 is paid in February 2018 d. Sales commissions equal to 20% of sales dollars are paid each month. Sales salaries (excluding commissions) are $90,ooo per year. e. General and administrative salaries are $144,0oo per year. Maintenance expense equals $3,0oo 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, $72,000; February, $96,000; and March, $28,800 This equipment will be depreciated using 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. g. The company plans to buy land at the end of March at a cost of $150,000, which will be paid with cash on the last day of the month h. The company has a contract 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 are made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of $36,000 at the end of each month. i. The income tax rate for the company is 40%. 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 (show supporting calculations as needed, and round amounts to the nearest dollar): 1. Monthly sales budgets (showing both budgeted unit sales and dollar sales) 2. Monthly merchandise purchases budgets Check (2) Budgeted purchases: January, $90,000; February, $255,000 3. Monthly selling expense budgets. (3) Budgeted selling expenses: January, $61,500; February, $79,500 4. Monthly general and administrative expense budgets. 5. Monthly capital expenditures budgets. 6. Monthly cash budgets Page 933 (6) Ending cash bal.: January, $182,850; February, $107,850 7. Budgeted income statement for the entire first quarter (not for each month) 8. Budgeted balance sheet as of March 31, 2018 (8) Budgeted total assets at March 31, $1,346,875 1 Depreciation Expense Calculations 2 Equipment owned on 12/31 3 Purchased in January 4 Purchased in February 5 Purchased in March 6 Total March Total anua Februar 9 Capital Expenditures Budget Total February March January 1 Equipment Purchases 2 Land Purchase 3 Total 5 Budgeted Cash Collections from Customers February March Total January 7 Total Sales 8 Cash Sales( %) 9 Credit Sales( %) 0 Cash Collections: 1Receivables (Beginning Balance) 2 Month after sale 3 Second Month 4 Total from Credit customers 5 Cash Sales 6 Total Cash Received 9 Budgeted Cash Payments for Purchases February March Total January 1 Credit Purchases 2 Accounts Payable (Beginning Balance) 3 Month after purchase (20%) 4 second month (80%) 5 Total paid for purchases Cash Budget February January March Beginning Cash Balance 1 Cash Receipts from Customers Total Cash Available Cash Disbursements: Payments for Purchases Sales Commissions Sales Salaries General & Administrative Salaries Maintenance Expense Interest Taxes Payable Purchase of Equipment Purchase of land Total Cash Disbursements 4Preliminary Balance Repayment of loan to bank Additional loan from bank 7Ending Cash Balance Loan balance, end of month Isle Corporation Budgeted Income Statement For the Quarter ended March 31, 2018 0 2 Budgeted Balance Sheet Isle Corporation Budgeted Balance Sheet 31-Mar-18 6 Assets 7 Cash 8 Accounts receivable 9 Inventory 0 Total Current Assets 1 Land 2 Equipment Less accumulated depreciation 4 Total Assets Cash budget Capital budget 6 Liabilities and Equity 7 Accounts payable 8 Bank loan payable 9 Taxes payable 0 Total liabilities 1 Common stock 2Retained earnings 3 Total stockholders' equity 4 Total liabilities and equity Cash Budget Income Statement 9 0