Problem 7-8AA 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		105,000
Total current assets				$	660,500
Equipment		552,000
Less: accumulated depreciation		69,000
Equipment, net					483,000
Total assets				$	1,143,500
Liabilities and Equity
Accounts payable	$	345,000
Bank loan payable		14,000
Taxes payable (due 3/15/2018)		89,000
Total liabilities				$	448,000
Common stock		470,000
Retained earnings		225,500
Total stockholders equity					695,500
Total liabilities and equity				$	1,143,500

To prepare a master budget for January, February, and March of 2018, management gathers the following information.

The companys single product is purchased for $20 per unit and resold for $53 per unit. The expected inventory level of 5,250 units on December 31, 2017, is more than managements desired level, which is 20% of the next months expected sales (in units). Expected sales are: January, 7,250 units; February, 9,500 units; March, 11,000 units; and April, 10,000 units.

Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 63% is collected in the first month after the month of sale and 37% in the second month after the month of sale. For the December 31, 2017, accounts receivable balance, $120,000 is collected in January and the remaining $400,000 is collected in February.

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, $85,000 is paid in January and the remaining $260,000 is paid in February.

Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $72,000 per year.

General and administrative salaries are $144,000 per year. Maintenance expense equals $1,800 per month and is paid in cash.

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, $100,800; and March, $21,600. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full months depreciation is taken for the month in which equipment is purchased.

The company plans to buy land at the end of March at a cost of $175,000, which will be paid with cash on the last day of the month.

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 a minimum ending cash balance of $17,373 at the end of each month.

The income tax rate for the company is 37%. Income taxes on the first quarters 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.