Question

Sweet Company, a specialty chocolate store, prepares a master budget on a quarterly basis. The company has assembled the following data to assist in preparing its 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:

	Debits	Credits
Cash	$ 50,000
Accounts Receivable	162,500
Inventory	58,000
Buildings and Equipment (net)	370,000
Accounts Payable		$ 65,000
Capital Stock		412,500
Retained Earnings		163,000
	$640,500	$640,500

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

November (actual)	$250,000
December (actual)	$300,000
January	$300,000
February	$650,000
March	$350,000
April	$200,000

c. Sales are 50% for cash sales and 50% for credit sales. Credit sales are collected in the two months following the sale: 90% the month after the sale, 10% two months after the sale. The accounts receivable at December 31 are a result of November and December credit sales.

d. The company’s gross margin is 45% of sales. (In other words, cost of goods sold is 55% of sales.)

e. Monthly salary and wage expenses are budgeted as follows: salaries and wages, $27,000 per month for the first two months, $26,000 in March as Sweet cuts the hours of its sales force to reflect declining sales.

f. Other monthly expenses are as follows: advertising $80,000 per month; shipping cost is 5% of total monthly sales revenues, and other expenses are 3% of sales revenues. Depreciation, including depreciation on new assets acquired during the quarter, will be $40,000 for the quarter.

g. Each month’s ending inventory should equal 10% of the following month’s cost of goods sold.

h. One-half of a month’s inventory purchases are paid for in the month of purchase; the other half is paid in the following month.

i. During January, the company will purchase a new copy machine for $2,000 cash. During March, other equipment will be purchased for cash at a cost of $79,500.

j. During January, the company will declare and pay $38,000 in cash dividends.

k. The company must maintain a minimum cash balance of $40,000. An open line of credit is available at a local bank for any borrowing that may be needed during the quarter. All borrowing is done at the beginning of a month, and all repayments are made at the end of a month. Borrowings and repayments of principal must be in multiples of $1,000. Interest is paid only at the time of payment of principal. The annual interest rate is 6%. (Figure interest on whole months, e.g., 2/12, 3/12.)

l. The company does not pay any income taxes.

Required:

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

3a. Merchandise purchases budget:

	January	February	March	Quarter
Budgeted cost of goods sold	$165,000*	$357,500
Add: Desired ending inventory	35,750’
Total needs	200,750
Less: Beginning inventory	58,000
Required purchases	$142,750
*$300,000 sales x 55% cost ratio=$165,000
‘$357,500 x 10%=$35,750

b. Schedule of expected cash disbursements for merchandise purchases:

	January	February	March	Quarter
December purchases	$65,000			$65,000
January purchases	71,375	$71,375		142,750
February purchases
March purchases
Total cash disbursements for purchases	$136,375

Please show your work, Thank you

Answer 1

Sweet Company
Cost of goods sold(100%-45%)
January	300000*55%=	$        1,65,000.00
February	650000*55%	$        3,57,500.00
March	350000*55%=	$        1,92,500.00
April	200000*55%=	$        1,10,000.00
	Schedule of Merchandise Purchase Budget
	January	February	March	Quarter
Cost of goods sold=(I)	$          1,65,000.00	$        3,57,500.00	$    1,92,500.00	$             7,15,000.00
Add: Ending Inventory=(II)	$              35,750.00	$            19,250.00	$        11,000.00	$                 11,000.00
Total needs=(i)+(II)	$          2,00,750.00	$        3,76,750.00	$    2,03,500.00	$             7,26,000.00
Beginning Inventory	$              58,000.00	$            35,750.00	$        19,250.00	$                 58,000.00
Required Purchases	$          1,42,750.00	$        3,41,000.00	$    1,84,250.00	$             6,68,000.00
Required Purchases=Cost of goods sold+Ending Inventory-Beginning Inventory
Closing Stock
January	357500*10%
February	192500*10%
March	110000*10%
Schedule of expected cash disbursement of merchandise Purchase
	January	February	March	Quarter
Accounts Payable	$              65,000.00			$                 65,000.00
January Purchase 1/2 in Jan, 1/2 in February	$              71,375.00	$            71,375.00		$             1,42,750.00
February Purchases 1/2 in Feb,1/2 in Mar		$        1,70,500.00	$    1,70,500.00	$             3,41,000.00
March Purchases=1/2 in March			$        92,125.00	$                 92,125.00
Payment for merchandise purchased	$          1,36,375.00	$        2,41,875.00	$    2,62,625.00	$             6,40,875.00
	January	February	March
Accounts Payable	$              65,000.00
January Purchase 1/2 in Jan, 1/2 in February	($142750*50%)	($142750*50%)
February Purchases 1/2 in Feb,1/2 in Mar		($341000*50%)	($341000*50%)
March Purchases=1/2 in March			($184250*50%)