Question

Near the end of 2019, the management of Dimsdale Sports Co., a merchandising company, prepared the following estimated balance sheet for December 31, 2019.

DIMSDALE SPORTS COMPANY Estimated Balance Sheet December 31, 2019
Assets
Cash	$	36,000
Accounts receivable		520,000
Inventory		135,000
Total current assets				$	691,000
Equipment		600,000
Less: Accumulated depreciation		75,000
Equipment, net					525,000
Total assets				$	1,216,000
Liabilities and Equity
Accounts payable	$	340,000
Bank loan payable		12,000
Taxes payable (due 3/15/2020)		88,000
Total liabilities				$	440,000
Common stock		473,500
Retained earnings		302,500
Total stockholders’ equity					776,000
Total liabilities and equity				$	1,216,000

To prepare a master budget for January, February, and March of 2020, management gathers the following information.

1. The company’s single product is purchased for $30 per unit and resold for $60 per unit. The expected inventory level of 4,500 units on December 31, 2019, is more than management’s desired level, which is 20% of the next month’s expected sales (in units). Expected sales are January, 6,750 units; February, 8,750 units; March, 10,500 units; and April, 10,500 units.
2. Cash sales and credit sales represent 25% and 75%, respectively, of total sales. Of the credit sales, 63% is collected in the first month after the month of sale and 37% in the second month after the month of sale. For the December 31, 2019, accounts receivable balance, $120,000 is collected in January 2020 and the remaining $400,000 is collected in February 2020.
3. Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the December 31, 2019, accounts payable balance, $70,000 is paid in January 2020 and the remaining $270,000 is paid in February 2020.
4. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $60,000 per year.
5. General and administrative salaries are $132,000 per year. Maintenance expense equals $1,800 per month and is paid in cash.
6. Equipment reported in the December 31, 2019, balance sheet was purchased in January 2019. It is being depreciated over eight years under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $36,000; February, $100,800; and March, $19,200. This equipment will be depreciated under the straight-line method over eight years with no salvage value. A full month’s depreciation is taken for the month in which equipment is purchased.
7. The company plans to buy land at the end of March at a cost of $160,000, which will be paid with cash on the last day of the month.
8. The company has a working arrangement with its bank to obtain additional loans as needed. The interest rate is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments on these loans can be made on the last day of the month. The company has agreed to maintain a minimum ending cash balance of $35,000 at the end of each month.
9. The income tax rate for the company is 37%. Income taxes on the first quarter’s income will not be paid until April 15.

Required:
Prepare a master budget for each of the first three months of 2020; include the following component budgets.

1. Monthly sales budgets.
2. Monthly merchandise purchases budgets.
3. Monthly selling expense budgets.
Monthly sales budgets. DIMSDALE SPORTS CO. Sales Budget For January, February, and March 2020 Budgeted Unit Budgeted Budgeted Total Sales Unit Price Dollars January February March Totals for the quarter

Answer 1

solution:

DIMSDALE SPORTS COMPANY
Sales Budget
January, February, and March 2020
	Budgeted Unit Sales	Budgeted Unit Price	Budgeted Sales Dollars
Jan-20	6750	$60.00	$405,000.00
Feb-20	8750	$60.00	$525,000.00
Mar-20	10500	$60.00	$630,000.00
Totals for the First quarter	26000	$60.00	$1,560,000.00

DIMSDALE SPORTS COMPANY
Merchandise purchases budget
January, February, and March 2020
	January	February	March
Next month's budgeted sales (units)	8750	10500	10500
Ratio of inventory to future sales	20%	20%	20%
Desired ending inventory	1750	2100	2100
Budgeted sales units	6750	8750	10500
Required units of available merchandise	8500	10850	12600
Beginning inventory	4500	1750	2100
Units to be purchased	4000	9100	10500
Cost per unit	$30.00	$30.00	$30.00
Budgeted cost of purchases	$120,000.00	$273,000.00	$315,000.00

DIMSDALE SPORTS COMPANY
Selling expenses Budget
January, February, and March 2020
	January	February	March	Total
Budgeted sales	$405,000.00	$525,000.00	$630,000.00	$1,560,000.00
Sales commission (%)	20%	20%	20%	20%
Sales commission	$81,000.00	$105,000.00	$126,000.00	$312,000.00
Sales salaries	$5,000.00	$5,000.00	$5,000.00	$15,000.00
Total selling expenses	$86,000.00	$110,000.00	$131,000.00	$327,000.00