QUESTION $1(40$ MARKS$)$

The management accountant at Exquisite Creations Company, William Marston is in the process of preparing the cash budget for the business for the fourth quarter of $2017.$ The company usually has to borrow money during this quarter. Extracts from the sales and purchases budgets are as follows:

Sales

Month

Cash Sales

On

Purchases

August

$$70,000$

Account

On Account

September

$$55,000$

$$420,000$

$$640,000$

$$550,000$

October

$$50,000$

$$550,000$

$$500,000$

November

$$45,000$

$$600,000$

$$600,000$

December

$$60,000$

$$800,000$

$$600,000$

$$400,000$

i$)$ An analysis of the records shows that trade receivables $($accounts receivable$)$ are settled according to the following credit pattern, in accordance with the credit terms $5/30$ n$90$:

$50\%$ in the month of sale

$40\%$ in the first month following the sale

$10\%$ in the second month following the sale

ii$)$ Accounts payable are settled as follows, in accordance with the credit terms $-10/30$ n$60$:

$70\%$ in the month in which the inventory is purchased

$30\%$ in the following month

Fixed operating expenses which accrue evenly throughout the year, are estimated to be $$1,560,000$ per annum, $($including depreciation on non$-$current assets of $$40,000$ per month$)$ and is settled monthly.

iv$)$ Wages and salaries are expected to be $\backslash$$ $2160000$ per annum and will be paid monthly.

v$)$ Other operating expenses are expected to be $$96,000$ per quarter and will be settled monthly.

vi$)$ Taxation of $$85,000$ has to be settled in December.

vii$)$ In the month of November, an old motor vehicle, with net book value of $$70,000,$ will be sold for cash to an employee at a gain of $$40,000.$ The employee will be allowed to pay a deposit equal to $65\%$ of the selling price in November and the balance settled in two equal amounts in December $2017$ & January of $2018.$

viii$)$ Computer equipment, which is estimated to cost $$125,500,$ will be acquired for cash in November.

ix$)$ The management of Exquisite Creations has negotiated with a tenant to rent office space to her beginning November $1.$ The rental is $$600,000$ per annum. The first month's rent along with one month's safety deposit is expected to be collected on November $1.$ Thereafter, monthly rental income becomes due at the beginning of each month.

Continued.

$245$

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