Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and, at certain times of the year, has experienced a shortage of cash. Because you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.The company sells many styles of earrings, but all are sold for the same price$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):January (actual)22,200June (budget)52,200February (actual)28,200July (budget)32,200March (actual)42,200August (budget)30,200April (budget)67,200September (budget)27,200May (budget)102,200 The concentration of sales before and during May is due to Mothers Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.Suppliers are paid $5.10 for a pair of earrings. One-half of a months purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a months sales are collected in the month of sale. An additional 70% are collected in the following month, and the remaining 10% are collected in the second month following sale. Bad debts have been negligible.Monthly operating expenses for the company are given below:Variable: Sales commissions4% of salesFixed: Advertising$ 310,000 Rent$ 29,000 Salaries$ 128,000 Utilities$ 12,500 Insurance$ 4,100 Depreciation$ 25,000 Insurance is paid on an annual basis, in November of each year.The company plans to purchase $21,500 in new equipment during May and $51,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $23,250 each quarter, payable in the first month of the following quarter.The companys balance sheet as of March 31 is given below:Assets Cash$ 85,000Accounts receivable ($42,300 February sales; $506,400 March sales)548,700Inventory137,088Prepaid insurance26,500Property and equipment (net)1,060,000Total assets$ 1,857,288Liabilities and Stockholders Equity Accounts payable$ 111,000Dividends payable23,250Common stock1,020,000Retained earnings703,038Total liabilities and stockholders equity$ 1,857,288The company maintains a minimum cash balance of $61,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.The company has an agreement with a 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 interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $61,000 in cash.Required:Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:A sales budget, by month and in total.A schedule of expected cash collections, by month and in total.A merchandise purchases budget in units and in dollars. Show the budget by month and in total.A schedule of expected cash disbursements for merchandise purchases, by month and in total.A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $61,000.A budgeted income statement for the three-month period ending June 30. Use the contribution approach.A budgeted balance sheet as of June 30.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting The Basis For Business Decisions

Authors: Robert F. Meigs, Mary A. Meigs, Mark Bettner, Ray Whittington

10th Edition

0070433607, 978-0070433601

More Books

Students also viewed these Accounting questions

Question

=+c. Find or create a visual.

Answered: 1 week ago