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The Observer Company is a small, rapidly growing wholesaler of consumer electronic products including small kitchen appliances and power tools. A sales forecast supplied by

The Observer Company is a small, rapidly growing wholesaler of consumer electronic products including small kitchen appliances and power tools. A sales forecast supplied by the Marketing Department predicts that sales during Quarter 1 of 20x2 will increase by 10% each month over the previous months sales. Then (beginning in April 20x2) sales are expected to remain constant for the next several months. The Company is going to put some new equipment in operation just after the New Year begins. They hope to finance it largely with cash and the sale of marketable securities, but if necessary they can get a short-term loan from the Karch Bank. Observers Balance Sheet at December 31,20x1 is as follows:
Observer Company- Balance Sheet -31-Dec-20x1
Assets:
Cash $ 35,000
Accounts Receivable 270,000
Marketable securities 15,000
Inventory 154,000
Building (net of accumulated depreciation)626,000
Total Assets 1,100,000
Liabilities and Stockholder's Equity:
Accounts payable $ 176,400
Bond interest payable 12,500
Property taxes payable 3,600
Bonds payable (due in 20x6)300,000
Common Stock 500,000
Retained Earnings $ 107,500
Total L & SE $ 1,100,000
As Assistant Controller for the Observer Company you are now preparing a monthly budget for Quarter 1 of 20x2. In this process, the following information has been accumulated:
(1) Projected Sales for December 20x1 are $400,000. Credit sales typically are 75% of total sales. Observers credit experience indicates that 10% of credit sales are collected during the month of sale, and the remainder is collected during the following month.
(2) Observers cost of goods sold is normally 70% of sales. Inventory is purchased on account and 40% of each months purchases are paid during the month of purchase. The remainder is paid during the following month. To have adequate amounts of inventory on hand Observer has a policy that inventory at the end of each month should equal half of the next months projected cost of goods sold.
(3) Observers other monthly expenses are estimated as follows:
Sales Salaries $21,000
Advertising & promotion $16,000
Administrative salaries $21,000
Depreciation $25,000(Includes depreciation on new equipment purchased at beginning of Quarter 1)
Interest on Bonds $2,500
Property taxes $900
Sales Commissions ---1 percent of current months sales
(4) The Company President has indicated that Observer will be investing $125,000 in equipment to be used in the firms warehouse just after the New Year begins. This equipment purchase will be financed from the companys cash and marketable securities. However, the President noted that Observer should keep a minimum cash balance of $25,000. If necessary, the remainder of the equipment purchased will be financed using short-term credit from the Karch Bank. The minimum period for such a loan is 3 months with short-term interest rates being 10% per year. If a loan is needed the President has decided that it should be paid off at the end of the Quarter 1.
(5) Observers Board of Directors has indicated an intention to declare and pay cash dividends of $50,000 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 Observers Bonds is paid semiannually on January 31 and July 31 for the preceding six-month period.
(7) Property taxes are paid semi-annually on February 28 and August 31 for the preceding six-month period.
Assignment: Please clearly provide each of the below in a table:
For the First Quarter 20x2
Sales Revenue
Less: Cost of Goods Sold
Gross Margin
Less: Selling & Administrative Expenses:
Sales salaries
Sales commissions
Advertising & promotion
Administrative salaries
Depreciation
Interest on bonds
Interest on short-term loan
Property taxes
Total S & A Expenses
Net Income
Observer Company
Budgeted Balance Sheet
3/31/20x2
Assets:
Cash
Accounts Receivable
Inventory
Building & Equipment (net of accumulated depreciation)
Total Assets
Liabilities and Stockholder's Equity:
Accounts payable
Bond interest payable
Property taxes payable
Bonds payable (due in 20x6)
Common Stock
Retained Earnings
Total Liabilities & Stockhoder's Equity

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