Required information [The following information applies to the questions displayed below] "We really need to get this new material-handling equipment in operation just after the new year begins. I hope we can finance it largely with cash and marketable securities, but if necessary we can get a short-term loan down at MetroBank." This statement by Beth Davies-Lowry, president of Intercoastal Electronics Company, concluded a meeting she had called with the firm's top management. Intercoastal is a small, rapidly growing wholesaler of consumer electronic products. The firm's main product lines are small kitchen appliances and power tools. Marcia Wilcox, Intercoastal's General Manager of Marketing, has recently completed a sales forecast. She believes the company's sales during the first quarter of 20x1 will increase by 10 percent each month over the previous month's sales. Then Wilcox expects sales to remain constant for several months. lntercoastal's projected balance sheet as of December 31, 20x0, is as follows: Cash $ 40,000 Accounts receivable 315,000 Marketable securities 20,000 Inventory 192,500 Buildings and equipment (net of accumulated depreciation) 669,000 Total assets $1,236,500 Accounts payable 5 249,375 Bond interest payable 15,000 Property taxes payable 6,000 Bonds payable (10%; due in 20x6) 360,000 Common stock 500,000 Retained earnings 106,125 Total liabilities and stockholders' equity $1,236.500 Jack Hanson, the assistant controller, is now preparing a monthly budget for the rst quarter of 20x1. In the process, the following information has been accumulated: 1. Projected sales for December of 20x0 are $500,000. Credit sales typically are 70 percent of total sales. lntercoastal's credit experience indicates that 10 percent of the credit sales are collected during the month of sale, and the remainder are collected during the following month. 2. Intercoastal's cost of goods sold generally runs at 70 percent of sales. Inventory is purchased on account, and 25 percent of each month's purchases are paid during the month of purchase. The remainder is paid during the following month. In order to have adequate stocks ofinventory on hand, the rm attempts to have inventory at the end of each month equal to half ofthe next month's projected cost of goods sold. 3. Hanson has estimated that Intercoastal's other monthly expenses will be as follows: Sales salaries $ 31,000 Advertising and promotion 16,000 Administrative salaries 31,000 Depreciation 30 , 000 Interest on bonds 3,000 Property taxes 1,500 I In addition, sales commissions run at the rate of3 percent of sales. 4. lntercoastal's president, DaviesLowry, has indicated that the firm should invest $105,000 in an automated inventory handling system to control the movement of inventory in the firm's warehousejust after the new year begins. These equipment purchases will be financed primarily from the firm's cash and marketable securities. However, Davies Lowry believes that Intercoastal needs to keep a minimum cash balance of $40,000. If necessary, the remainder of the equipment purchases will be financed using shortterm credit from a local bank. The minimum period for such a loan is three months. Hanson believes shortterm interest rates will be 10 percent per year at the time ofthe equipment purchases. lfa loan is necessary, Davies-Lowry has decided it should be paid off by the end of the first quarter if possible. 5. Intercoastal's board of directors has indicated an intention to declare and pay dividends of $75,000 on the last day of each quarter. 6. The interest on any short-term borrowing will be paid when the loan is repaid. Interest on Intercoastal's bonds is paid semiannually on January 31 and July 31 for the preceding sixmonth period. 7. Property taxes are paid semiannually on February 28 and August 31 for the preceding sixmonth period. Required: Prepare lntercoastal Electronics Company's master budget for the first quarter of 20x1 by completing the following schedules and statements. 1. Sales budget: 9 Answer is complete and correct. $ 500,000 0 150,000 0 350,000 $ 550,000 0 165,000 0 385,000 $ 605,000 0 181,500 0 423,500 $665,500 0 $ 1,320,500 0 199,550 9 546,150 0 465,850 1 274,350 Total sales Cash sales Sales on account 2. Cash receipts budget: 0 Answer is complete and correct. $ Cash sales 165 000 o $ 181,500 0 $199,650 0 $ 546,150 0 graftihcollections from credit sales made during current 46,585 0 127,435 0 Cash collections from credit sales made during preceding 381 150 o 1 042 650 0 month Total cash receipts $ 627,385 $ 1,716,235 A In. _ A o? _ _ A III A n . A 3. Purchases budget: 0 Answer is complete and correct. Budgeted cost of goods sold 350,000 a $ $ 385,000 g $ 423,500 9 $465,850 0 1274350 0 Add: Desired ending inventory :3 192,500 0 $ 211,750 0 $ 232,925 0 $232,925 0 $ 232,925 0 Total goods needed $ 542,500 $ 596,750 $ 656,425 Less: Expected beginning inventory Purchases $ 367,500 $ 404,250 $ 444,675 $ $ 698'775 1,507,275 211,750 0 232,925 9 192,500 0 175,000 9 192,500 0 $ $465350 1,314,775 Q Answer is complete but not entirely correct. Inventory purchases: Cash payments for purchases during the current month $101,0630 $ 111,1690 $116,463 0 $ 3223,6950 Cash payments for purchases during the preceding month 249,375 9 303,157 9 333,506 0 886,068 9 Total cash payments for inventory purchases $ 350,438 $ 414,356 $1,214,763 Other expenses: Sales salaries $ 31,000 Q 3 31,000 0 $ 31,000 9 $ 93,000 0 Advertising and promotion 16,000 0 48,000 0 Administrative salaries 31,000 Q 93,000 0 Interest on bonds Property taxes Sales commissions 18,150 a 19,965 0 Total cash payments for other expenses $ 112,500 $ 105,150 $ 97,965 $ 315,615 Total cash disbursements $462,938 9 $ 519,506 6 $547,934 9 $1,530,373 6 5. Complete the first three lines of the summary cash budget. Then do the analysis of shortterm financing needs in requirement (6). Then finish requirement (5). Q Answer is complete but not entirely correct. $ 627,385 0 $ 1,716,235 0 547,934 0 1,530,378 a Cash receipts (from part 2) $ 518,500 0 $ 570,350 0 Less: Cash disbursements (from part 4) 462,938 Q 519,506 0 Change in cash balance during period due to $ 55 562 operations ' Sale of marketable securities (1l2lx1) Proceeds from bank loan (1l2lx1) Purchase of equipment (105,000) 0 $ 185,857 20,000 0 (105,000) 0 Repayment of bank loan (3/31/x1) 0 0 (85,000) 0 (85,000) 0 Interest on bank loan (2,125) 0 (2,125) a Payment of dividends (75,000) 0 (75,000) 0 Change in cash balance during rst quarter $ 23,732 a Cash balance, 1/1lx1 40,000 9 Cash balance, 3/31/x1 $ 63,732 9 6. Calculation of required shortterm borrowing. 9 Answer is complete and correct. Projected cash balance as of December 31, 20x0 $ 40,000 0 Less: Minimum cash balance 40,000 a Cash available for equipment purchases m securities 7. Prepare Intercoastal Electronics' budgeted income statement for the first quarter of 20x1. (Ignore income taxes.) 0 Answer is complete and correct. Sales revenue 0 $1,820,500 0 Cost of goods sold 0 1,274,350 0 Gross margin 0 $ 546,150 Selling and administrative expenses: Sales salaries o $ 93,000 0 Advertising and promotion 0 48,000 9 Administrative salaries 0 93,000 0 Interest on bonds 0 9,000 0 Property taxes 0 4,500 0 Sales commissions 0 54,615 0 Interest on short-term bank loan 0 2,125 o Depreciation a 90,000 0 o 0 Total selling and administrative 394 240 expenses ' Net income 0 $ 151,910 0 8. Prepare Intercoastal Electronics' budgeted statement of retained earnings for the first quarter of 20x1. a Answer is complete and correct. Retained earnings, 12/31/x0 $ 106,125 a Add: Net income 0 151,910 a (75,000) a Less: Dividends Retained earnings, 3/31/x1 $ 183,035 a 9. Prepare lntercoastal Electronics' budgeted balance sheet as of March 31, 20x1. (Hint: On March 31, 20x1, Bond Interest Payable is $6,000 and Property Taxes Payable is $1,500.) 9 Answer is complete but not entirely correct. Cash 419,265 0 232,925 a 684,000 0 00 $ 1,399,922 Accounts receivable Inventory Buildings and equipment Total assets Accounts payable Bond interest payable Property taxes payable Bonds payable 360,000 0 Common stock 500,000 0 Retained earnings 183,035 0 Total liabilities and stockholders' eouitv 1.399.922