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CASE 9-30 Master Budget with Supporting Schedules

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CASE 9-30 Master Budget with Supporting Schedules [LO2, LO4, LO8, LO9, LO10]

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.
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. 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 priceâ?"$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

The concentration of sales before and during May is due to Mother's 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 $4 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:

Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.
A listing of the company's ledger accounts as of March 31 is given below:

The company maintains a minimum cash balance of $50,000. 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 that 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 $50,000 in cash.
Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets:
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections from sales, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.
(1c) April purchases: 79,000 units
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. 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 $50,000. (Check point: June 30 cash balance: $94,700)
3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.
4. A budgeted balance sheet as of June 30.
(Garrison, Ray. Managerial Accounting, 13th Edition. McGraw-Hill Learning Solutions, 2010. pp. 414 - 415).

Given Data Case 09-30:


Minimum ending cash balance $50,000
Selling price $10

Recent and forecast sales:
January (actual) $ 20,000
February (actual) $ 26,000
March (actual) $ 40,000
April $ 65,000
May $ 100,000
June $ 50,000
July $ 30,000
August $ 28,000
September $ 25,000

Desired ending inventories (percentage 40%
of next month's sales)
Cost of earrings $ 4

Purchases paid as follows:
In month of purchase 50%
In following month 50%

Collection on sales:
Sales collected current month 20%
Sales collected following month 70%
Sales collected 2nd month following 10%

Variable monthly expenses:
Sales commissions (% of sales) 4%

Fixed monthly expenses:
Advertising $ 200,000
Rent $ 18,000
Salaries $ 106,000
Utilities $ 7,000
Insurance (12 months paid in November) $ 3,000
Depreciation $ 14,000

Equipment purchased in May $ 16,000
Equipment purchased in June $ 40,000
Dividends declared each quarter $ 15,000

Balance sheet at March 31:
Cash $74,000
Accounts receivable 346,000
Inventory 104,000
Prepaid insurance 21,000
Property and equipment (net) 950,000
Total assets $1,495,000

Liabilities and Stockholders' Equity
Accounts payable $100,000
Dividends payable 15,000
Capital stock 800,000
Retained earnings 580,000
Total liabilities and stockholders' equity $1,495,000

Agreement with Bank:
Borrowing increments $1,000
Interest rate per month 1%
Repayment increments $1,000
Total of interest paid each quarter 100%
Required minimum cash balance $50,000


Solution Summary

The solution provides an excel template completed with correct amounts for all schedules ("correct" light is on). Additional instruction is provided to show how to figure the beginning inventory for April and how the collections is spread across the months. Click in cells to see computations. There is no paragraph instructions -- just formulas to indicate how each amount was collected and computed.