PROBLEM 7-22B

PROBLEM 7-22B

Completing a Master Budget

(LO2, LO4, LO7, L08, LO9, LO10)

CHECK FIGURE

(2a) February purchases: $254,800

(4) February ending cash balance: $30,400

Spektra Company, a home furnishings 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:

DebitsCredits

Cash $ 31,000

Accounts Receivable 135,000

Inventory 161,700

Building and Equipment (net) 160,000

Accounts Payable $178,000

Capital Stock 65,000

Retained Earnings 0 244,700

$487,700$487,700

b.Actual sales for December and budgeted sales for the next four months are as follows:

December (actual) $300,000

January $330,000

February $350,000

March $370,000

April $360,000

c.Sales are 55% for cash and 45% 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 30% of sales. (In other words, cost of goods sold is 70% of sales.)

e.Monthly expenses are budgeted as follows: salaries and wages, $18,000 per month: advertising, $15,000 per month; shipping, 4% of sales; other expense, 8% of sales. Depreciation, including depreciation on new assets acquired during the quarter, will be $24,000.

Each month’s ending inventory should equal 70% of the following month’s cost of goods sold.

g.25% of a month’s inventory purchases are paid for in the month of purchase; the remainder is paid for in the following month.

h.During February, the company will purchase land for $22,000 cash. During March, land will be purchased for cash at a cost of $2,000.

i.During January, the company will declare and pay $30,000 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, up to a total of $40,000. The interest rate on these loans is 1% per month and for simplicity we will assume the 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.

Required:

Using the data above, complete the following statements and schedules for the first quarter:

1.Schedule of expected cash collections:

JanuaryFebruaryMarchQuarter

Cash sales $ 181,500

Credit sales 135,000

Total cash collections $ 316,500

2.a.Inventory purchases budget:

January February March Quarter

Budgeted cost of goods sold $231,000*$245,000

Add desired ending inventory 171,500†

Total needs 402,500

Less beginning inventory 161,700

Required purchases $240,800

* $330,000 sales × 70% cost ratio = $231,000

†$245,000 × 70% = $171,500

b.Schedule of expected cash disbursements for merchandise purchases:

January February March Quarter

December purchases $178,000 $178,000

January purchases 60,200 $180,600 240,800

February purchases

March purchases

Total cash disbursements for purchases $238,200

3.Schedule of expected cash disbursements for selling and administrative expenses:

January February March Quarter

Salaries and wages $18,000

Advertising 15,000

Shipping 13,200

Other expenses 26,400

Total cash disbursements for selling and administrative expenses $72,600

4.Cash budget:

January February March Quarter

Cash balance, beginning $ 31,000

Add cash collections 316,500

Total cash available 347,500

Less cash disbursements:

Purchases of inventory 238,200

Selling and administrative expenses 72,600

Purchases of land 0

Cash dividends 30,000

Total cash disbursements 340,800

Excess (deficiency) of cash 6,700

Financing:

Etc.

5.Prepare an absorption costing income statement for the quarter ending March 31 as shown in Schedule 9 in the chapter.

6.Prepare a balance sheet as of March 31.