Question

Dimsdale Sports, a merchandising company, reports the following balance sheet at December 31. DIMSDALE SPORTS COMPANY Balance Sheet December 31 Assets Cash $ 21,000 Accounts receivable 520,000 Inventory 142,500 Equipment $ 600,000 Less: Accumulated depreciation 75,000 525,000 Total assets $ 1,208,500 Liabilities and Equity Liabilities Accounts payable $ 360,000 Loan payable 12,000 Taxes payable (due March 15) 91,000 463,000 Equity Common stock $ 474,000 Retained earnings 271,500 745,500 Total liabilities and equity $ 1,208,500 To prepare a master budget for January, February, and March, use the following information. The company’s single product is purchased for $30 per unit and resold for $57 per unit. The inventory level of 4,750 units on December 31 is more than management’s desired level, which is 20% of the next month’s budgeted sales units. Budgeted sales are January, 6,750 units; February, 9,250 units; March, 11,500 units; and April, 10,500 units. All sales are on credit. Cash receipts from sales are budgeted as follows: January, $264,663; February, $722,089; March, $534,161. Cash payments for merchandise purchases are budgeted as follows: January, $70,000; February, $313,100; March, $150,600. Sales commissions equal to 20% of sales dollars are paid each month. Sales salaries (excluding commissions) are $5,500 per month. General and administrative salaries are $12,000 per month. Maintenance expense equals $2,100 per month and is paid in cash. New equipment purchases are budgeted as follows: January, $38,400; February, $96,000; and March, $24,000. Budgeted depreciation expense is January, $ 6,650; February, $7,650; and March, $7,900. The company budgets a land purchase at the end of March at a cost of $175,000, which will be paid with cash on the last day of the month. The company has an agreement with its bank to obtain additional loans as needed. The interest rate is 1% per month and interest is paid at each month-end based on the beginning-month balance. Partial or full payments on these loans are made on the last day of the month. The company maintains a minimum ending cash balance of $21,000 at the end of each month. The income tax rate for the company is 41%. Income taxes on the first quarter’s income will not be paid until April 15. Required: Prepare a master budget for the months of January, February, and March that has the following budgets: 1. Sales budgets. 2. Merchandise purchases budgets. 3. Selling expense budgets. 4. General and administrative expense budgets. Hint: Depreciation is included in the general and administrative budget for merchandisers. 5. Capital expenditures budgets. 6. Cash budgets. 7. Budgeted income statement for entire quarter (not monthly) ended March 31. 8. Budgeted balance sheet as of March 31.

Answer 1

To prepare a master budget for January, February, and March, you need to create several budgets including sales budgets, merchandise purchases budgets, selling expense budgets, general and administrative expense budgets, capital expenditures budgets, cash budgets, a budgeted income statement for the entire quarter, and a budgeted balance sheet as of March 31.

Step-by-step explanation:

To prepare a master budget for January, February, and March, we need to create several budgets:

1. Sales Budgets: Calculate the budgeted sales for each month based on the given information. For example, multiply the budgeted sales units for January (6,750 units) by the selling price per unit ($57) to get the budgeted sales amount for January.
2. Merchandise Purchases Budgets: Calculate the cash payments for merchandise purchases for each month by multiplying the budgeted purchase units for each month by the purchase price per unit ($30).
3. Selling Expense Budgets: Calculate the sales commissions for each month by multiplying the budgeted sales dollars by 20%. Also, include the sales salaries.
4. General and Administrative Expense Budgets: Include the general and administrative salaries, maintenance expense, and budgeted depreciation expense.
5. Capital Expenditures Budgets: Calculate the cash payments for new equipment purchases for each month.
6. Cash Budgets: Calculate the monthly cash receipts from sales, cash payments for merchandise purchases, sales commissions, sales salaries, general and administrative salaries, maintenance expense, new equipment purchases, and the land purchase. Subtract the cash payments from the cash receipts to find the net cash increase or decrease for each month. Add the net cash increase or decrease to the beginning cash balance to find the ending cash balance for each month.
7. Budgeted Income Statement: Calculate the total sales, cost of goods sold, gross profit, total expenses, and net income for the entire quarter.
8. Budgeted Balance Sheet: Calculate the total assets, liabilities, and equity for the end of March, based on the budgeted changes throughout the quarter.