Problem 8-31 (Algo) Completing a Master Budget [LO8-2, LO8-4, LO8-7, LO8-8, LO8-9, LO8-10] Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly basis. The following data have been assembled to assist in preparing the master budget for the first quarter: a. As of December 31 (the end of the prior quarter), the company's general ledger showed the following account balances: Cash Accounts receivable Inventory Buildings and equipment (net) Accounts payable Common stock Retained earnings Debits $ 61,000 216,800 60,900 371,000 Credits $ 91,425 500,000 118,275 $ $ 709,700 709,700 b. Actual sales for December and budgeted sales for the next four months are as follows: December (actual) January February March April $ 271,000 $ 406,000 $ 603,000 $ 318,000 $ 214,000 c. Sales are 20% for cash and 80% on credit. All payments on credit sales are collected in the month following sale. The accounts receivable at December 31 are a result of December credit sales. d. The company's gross margin is 40% of sales. (In other words, cost of goods sold is 60% of sales.) e. Monthly expenses are budgeted as follows: salaries and wages, $36,000 per month: advertising, $60,000 per month; shipping, 5% of sales; other expenses, 3% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $45,460 for the quarter. f. Each month's ending inventory should equal 25% of the following month's cost of goods sold. g. One-half of a month's inventory purchases is paid for in the month of purchase; the other half is paid in the following month. h. During February, the company will purchase a new copy machine for $3,100 cash. During March, other equipment will be purchased for cash at a cost of $80,500. the i. During January, the company will declare and pay $45,000 in cash dividends. j. Management wants to maintain a minimum cash balance of $30,000. The company has an agreement with a local 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. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Complete the Schedule of expected cash collections: Schedule of Expected Cash Collections January February March Cash sales Credit sales $ 81,200 Quarter $ 81,200 216,800 216,800 Total collections $ 298,000 $ 0 $ 0 $ 298,000 Complete the merchandise purchases budget: Merchandise Purchases Budget January February March Quarter Budgeted cost of goods sold $243,600* $ 361,800 Add desired ending inventory 90,450 Total needs 334,050 361,800 0 0 Less beginning inventory 60,900 Required purchases $ 273,150 $ 361,800 $ 0 $ 0 *$406,000 sales x 60% cost ratio = $243,600. +$361,800 x 25% $90,450. Complete the schedule of expected cash disbursements for merchandise purchases. Schedule of Expected Cash Disbursements for Merchandise Purchases January February March December purchases January purchases $ 91,425 136,575 136,575 Quarter $ 91,425 273,150 February purchases 0 March purchases Total cash disbursements for purchases $228,000 $136,575 $ 0 $ 364,575 Hillyard Company Cash Budget January February March Quarter Beginning cash balance $ 61,000 Add collections from customers Total cash available 298,000 359,000 0 0 0 Less cash disbursements: Inventory purchases 228,000 Selling and administrative expenses 128,480 Equipment purchases Cash dividends 45,000 Total cash disbursements 401,480 0 0 0 Excess (deficiency) of cash (42,480) 0 0 0 Financing: Borrowings Repayments Interest Total financing 0 0 Ending cash balance $ (42,480) $ 0 $ 0 $ 0