Concept explainers
Near the end of 2015, the management of Isle Corp., a merchandising company, prepared the following estimated balance sheet for December 31, 2015.
ISLE CORPORATION Estimated Balance Sheet December 31,2015 |
|||||
Assets |
Liabilities and Equity |
||||
Cash | $ 36,000 | Accounts payable | $360,000 | ||
525,000 | Bank loan payable | 15,000 | |||
Inventory | 150,000 | Taxes payable (due 3/15/2016) | 90,000 | ||
Total current assets | $ 711,000 | Total Liabilities | $ 465,000 | ||
Equipment | 540,000 | Common stock | 472,500 | ||
Less: |
67,500 | 246,000 | |||
Equipment, net | 472,500 | Total stockholders’ equity | 718,500 | ||
Total assets | $1,183,500 | Total Liabilities and equity | $1,183,500 |
To prepare a
- Isle Corp.’s single product is purchased for $30 per unit and resold for $45 per unit. The expected inventory level of 5,000 units on December 32,2015, is more than management’s desired level for 2016, which is 25% of the next month’s expected sales (in unit). Expected sales are: January, 6,000 units; February, 8,000 units; Match, 10,000 units; and April, 9,000 units.
- Cash sales and credit sales represent 15% and 75%, respectively, of total sales. Of the credit sales, 60% is collected in the first month after the month of sale and 40% in the second month after the month of sale. For the $525,000 accounts receivable balance at December 31, 2015, $315,000 is collected in January 2014 and the remaining $210,000 is collected in February 2016.
- Merchandise purchases are paid for as follow: 20% in the first month after the month of purchase and 80% in the second month after the month of purchase. For the $360,000 accounts payable balance at December 31, 2015, $72,000 is paid in January 2016 and the remaining $288,000 is paid in February 2016.
- Sales commission equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are $90,000 per year.
- General and administrative salaries are $144,000 per year. Maintenance expense equals $3,000 per month and is paid in cash.
- Equipment reported in the December 31, 2015, balance sheet was purchased in January 2015. It is being
depreciated over eight year under the straight-line method with no salvage value. The following amounts for new equipment purchases are planned in the coming quarter: January, $72,000; February, $96,000; and March, $28,800. This equipment will be depreciation is taken for the month in which equipment is purchased. - The company plans to acquire land at the end of March at a cost of $150,000, which will be paid with cash on the last day of the month.
- Isle Corp. 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. Isle has agreed to maintain a minimum ending cash balance of $36,000 in each month.
- The income tax rate for the company is 40%. Income taxes on the quarter’s income will not be paid until April 15.
Required
Prepare a master budget for each of the first three months of 2016; include the following component budgets (show supporting calculations as needed, and round amounts to the nearest dollar):
- Monthly sales budgets (showing both budgeted unit sales and dollar sales).
- Monthly merchandise purchases budgets.
- Monthly selling expense budgets.
- Monthly general and administrative expense budgets.
- Monthly capital expenditures budgets.
- Monthly
cash budgets. Budgeted income statement for the entire first quarter (not for each month).- Budgeted balance sheet as of march 31, 2016.
Concept introduction:
Master forecast
Master budget is a plan which predicts sales and ends with money (cash) forecast and with statement of finance. It is also known as joint forecast manufactured by company at a very small level. It also includes budget for money(cash), forecasted statement of finance and monetary plan.
Sales forecast:
It relates to the monetary plan that shows the manner in which capital can be assigned in best way for achieving target for sales. The aim of this budget is to curb and plan for the expenditure incurred for objective achievement with respect to sales.
Requirement 1:
Sales forecast for the first quarter of the calendar.
Answer to Problem 8PSB
Therefore, it is determined that sales forecast for quarter first is $1080000.
Explanation of Solution
Sales forecast:
It relates to the monetary plan sales target. The aim of this budget is to curb and plan for the expenditure incurred for objective achievement with respect to sales.
So, computation of sales forecast is given below.
I corporation forecast for sales | |||
Particulars | Forecasted units | Unit value | Dollar(total) |
January | 6000 | 45 | 270000 |
February | 8000 | 45 | 360000 |
March | 10000 | 45 | 450000 |
first quarter total | 24000 | 1080000 |
Therefore it is determined that sales forecast for quarter first is $1080000.
Concept introduction:
A commodity purchase forecast (budget) is one of the running forecast (budget). It is one of the running activities from which income can be generated. It is based on the required number of units to be sold as per the commodity sales budget.
Requirement 2:
To explain:
Commodity purchase forecast (budget) for the first quarter of the calendar.
Answer to Problem 8PSB
Therefore, it is determined that the commodity purchase forecast (budget) for Jan is 90000for Feb it is 255000 and for March it is 292500.
Explanation of Solution
I corporation commodity purchase forecast (budget) | |||
Particulars | January | February | March |
Forecast sales for succeeding month | 8000 | 10000 | 9000 |
Ratio of stock to upcoming sales | *.25 | *.25 | *.25 |
Forecasted closing stock | 2000 | 2500 | 2250 |
Add- forecasted sales | 6000 | 8000 | 10000 |
Required available commodity | 8000 | 10500 | 12250 |
Less-opening stock | (5000) | (2000) | (2500) |
Units to be purchased | 3000 | 8500 | 9750 |
Forecast cost per unit in $ | 30 | 30 | 30 |
Forecast commodity purchase in $ | 90000 | 255000 | 292500 |
Therefore, it is determined that the commodity purchase forecast (budget) for Jan is 90000for Feb it is 255000 and for March it is 292500.
Concept introduction:
Forecast for selling expenses relates to marketing, engineering and accounting.
Requirement 3:
Selling expenses forecast for the first quarter of the calendar.
Answer to Problem 8PSB
Hence, it is determined that selling expenses forecast for Jan is $61500, for Feb it is $79500 and for March it is $97500.
Explanation of Solution
Forecast for selling expenses relates to sales, marketing, engineering and accounting.
So computation of selling expenses forecast is given below.
I corporation selling expenses forecast | |||
Particulars | January | February | March |
Forecasted sales | 270000 | 360000 | 450000 |
Commission percentage sales | *.20 | *.20 | *.20 |
Expenses related to sales commission | 54000 | 72000 | 90000 |
Salaries of sales | 7500 | 7500 | 7500 |
Selling expenses in total | $61500 | $79500 | $97500 |
Hence, it is determined that selling expenses forecast for Jan is $61500, for Feb it is $79500 and for March it is $97500.
Concept introduction:
Administrative and general expenditure forecast relates to those expenditure that are made for running of the company i.e. rent, utilities and insurance. It does not include expenditure that are in relation to manufacturing of the commodity and services.
Requirement 4:
Administrative and general expenses forecast for the first quarter of the calendar.
Answer to Problem 8PSB
Hence, it is determined that administrative and general expenses forecast for Jan is $21375, for Feb it is $22375 and for March it is $22675.
Explanation of Solution
Administrative and general expenditure forecast relates to administrative expenditure ex- rent, utilities and insurance.
So, computation of Administrative and general expenditure forecast is given below.
I corporation administrative and general expenses forecast | |||
Particulars | January | February | march |
Salaries | 12000 | 12000 | 12000 |
Maintenance | 3000 | 3000 | 3000 |
Depreciation | 6375 | 7375 | 7675 |
Expenses total | $21375 | $22375 | $22675 |
Hence, it is determined that administrative and general expenses forecast for Jan is $21375, for Feb it is $22375 and for March it is $22675.
Concept introduction:
Capital expenditure forecast (budget) represents the amount expected from investment. It determines the capacity to produce.
Capital expenditure forecast (budget)for the first quarter of the calendar.
Answer to Problem 8PSB
Hence, it is determined that Capital expenditure forecast (budget) for the months; Jan, Feb and March are: $72000, $96000 and $178800.
Explanation of Solution
Capital expenditure forecast (budget) represents the amount expected from investment. It determines the capacity to produce.
So, computation of Capital expenditure forecast (budget) is given below.
I corporation Capital expenditure forecast (budget) | |||
Particulars | January | February | March |
Equipment purchased | 72000 | 96000 | 28800 |
Land purchase | - | - | 150000 |
Total | 72000 | 96000 | 178800 |
Hence, it is determined that Capital expenditure forecast (budgets) for the months; Jan, Feb and March are: $72000, $96000 and $178800.
Concept introduction:
Cash received forecast shows the outflow and inflow of money(cash)to assess the money(cash) balance to meet the obligation of cash.
Cash forecast for the first quarter of the calendar.
Answer to Problem 8PSB
Therefore, the closing balance for January $182850, for February $107850 and for March is $36000.
Explanation of Solution
Cash received forecast shows the outflow and inflow of money(cash) on forecasted period to assess the money(cash) balance to meet the obligation of cash.
So, computation of cash received forecast is given below.
Supporting calculation | |||
Particulars | January | February | March |
Total sales | 270000 | 360000 | 450000 |
Cash sales (25%) | 67500 | 90000 | 112500 |
Amount due from last month(75%of credit sales) | 202500 | 270000 | 337500 |
Cash collection | |||
Amount to received at 31/12/16 | 315000 | 210000 | |
Month after sale (60%) | 121500 | 81000 | |
First month (40%) | 162000 | ||
Credit from customer | 315000 | 331500 | 243000 |
Cash sales | 67500 | 90000 | 112500 |
Total cash received | 382500 | 421500 | 355500 |
Supporting calculation | January | February | March |
Purchases on credit | 90000 | 255000 | 292500 |
Amount to be paid | 72000 | 288000 | |
Month after purchase (20%) | 18000 | 72000 | |
First month (80%) | 51000 | ||
Total on purchase | 72000 | 306000 | 123000 |
I corporation cash budget | January | February | March |
Opening cash balance | 36000 | 182850 | 107850 |
Cash received from customer | 382500 | 421500 | 355500 |
Available cash | 418500 | 604350 | 463350 |
Disposal of cash | |||
Payment for commodity | 72000 | 306000 | 123000 |
Commissions on sales | 54000 | 72000 | 90000 |
Salaries sales | 7500 | 7500 | 7500 |
Administrative and salaries | 12000 | 12000 | 12000 |
Expenses for maintenance | 3000 | 3000 | 3000 |
Interest (15000*1%) | 150 | ||
Tax payable | 90000 | ||
Purchase of equipment | 72000 | 96000 | 28800 |
Purchase of land | 150000 | ||
Total cash disposal | 220650 | 496500 | 504300 |
Cash balance preliminary | 197850 | 107850 | (40950) |
Bank loan payment | (15000) | ||
Closing balance of cash | 182850 | 107850 | 36000 |
Therefore, the closing balance for the months; January, Feb and March are; $182850, $107850 and $36000.
Concept introduction:
Forecasted statement of income assess the financial standing of the company. It depicts the income, expenses and net income of a firm.
Forecasted income statement for the entire first quarter.
Answer to Problem 8PSB
Hence, it is determined that net revenue for first quarter is $32955.
Explanation of Solution
Forecasted statement of income assesses the financial standing of the company. It depicts the income, expenses, net income of a firm over a period.
So, computation of income statement forecast is given below.
I corporation forecasted income statement | |||
sales | $1080000 | ||
Cost of goods sold(COGS)(24000*$30) | 720000 | ||
Gross profit | 360000 | ||
Running expenses | |||
Commission on sales | 216000 | ||
Salaries | 22500 | ||
Administrative & general salaries | 36000 | ||
Maintenance expenses | 9000 | ||
Depreciation | 21425 | ||
Interest expenses | 150 | 305075 | |
Before tax income | 54925 | ||
Tax (54925*40%) | 21970 | ||
Net revenue | 32955 |
Hence, it is determined that net revenue for first quarter is $32955.
Concept introduction:
Financial statement also known as balance sheet that help in summarizing assets, liabilities and equity of the company held by shareholders.
Requirement 8:
Financial statement for the entire first quarter.
Answer to Problem 8PSB
Hence, it is determined that total of asset and liabilities for first quarter is $1568650.
Explanation of Solution
Financial statement also known as balance sheet that help in summarizing assets, liabilities and equity of the company held by shareholders at point of time.
So, computation of Financial statement forecast is given below.
DS company forecasted income statement | |||
Asset | |||
Cash | 36000 | ||
Amount due | 445500 | ||
Raw material stock | 67500 | ||
Total current asset | 549000 | ||
Land | 150000 | ||
Equipment | 736800 | ||
Less-depreciation | 88925 | 647875 | |
Total of asset | $1346875 | ||
Liabilities and equities | |||
Account to be paid | 496500 | ||
Bank loan | 76950 | ||
Taxes | 21970 | ||
Total of liabilities | 595420 | ||
Common inventory | 472500 | ||
Retained income | 278955 | ||
Total equity shareholder | 751455 | ||
Total equity and liabilities | 1346875 |
Hence, it is determined that total asset and liabilities is $1346875.
Working notes
Accounts | Amount due | Stock | ||
Opening due | 525000 | Opening stock | 150000 | |
Credit sales | 810000 | Purchases | 637500 | |
Less-amount collected | 889500 | Less-cost of goods sold(COGS) | 720000 | |
Closing dues | 445500 | Closing stock | 67500 | |
Equipment | Depreciation | |||
Opening equipment | 540000 | Opening accumulated depreciation | 67500 | |
Purchase in January | 72000 | Depreciation expenses | 21425 | |
Purchase in February | 96000 | Total | 88925 | |
Purchase in march | 28800 | |||
Total | 736800 |
Amount to be paid
Retained earning
Opening amount to be paid
$360000
Opening retained earning
246000
Purchases
637500
Net income
32955
Payments
501000
Total
$278955
Ending amount to be paid
$549600
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Chapter 7 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
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