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Case 8-31 Master Budget with Supporting Schedules [LO8-2, LO8-4,LO8-8, LO8-9, LO8-10]

You have just been hired as a new management trainee by EarringsUnlimited, a distributor of earrings to various retail outletslocated in shopping malls across the country. In the past, thecompany has done very little in the way of budgeting and at certaintimes of the year has experienced a shortage of cash.

Since you are well trained inbudgeting, you have decided to prepare comprehensive budgets forthe upcoming second quarter in order to show management thebenefits that can be gained from an integrated budgeting program.To this end, you have worked with accounting and other areas togather the information assembled below.

The company sells many styles ofearrings, but all are sold for the same price—$11 per pair. Actualsales of earrings for the last three months and budgeted sales forthe next six months follow (in pairs of earrings):

January(actual)	20,200	June (budget)	50,200
February(actual)	26,200	July (budget)	30,200
March (actual)	40,200	August (budget)	28,200
April (budget)	65,200	September(budget)	25,200
May (budget)	100,200

The concentration of sales before and during May is due toMother’s Day. Sufficient inventory should be on hand at the end ofeach month to supply 40% of the earrings sold in the followingmonth.

Suppliers are paid $4.1 for a pairof earrings. One-half of a month’s purchases is paid for in themonth of purchase; the other half is paid for in the followingmonth. All sales are on credit, with no discount, and payablewithin 15 days. The company has found, however, that only 20% of amonth’s sales are collected in the month of sale. An additional 70%is collected in the following month, and the remaining 10% iscollected in the second month following sale. Bad debts have beennegligible.

Monthlyoperating expenses for the company are given below:

Variable:
Sales commissions		4%	of sales
Fixed:
Advertising	$	210,000
Rent	$	19,000
Salaries	$	108,000
Utilities	$	7,500
Insurance	$	3,100
Depreciation	$	15,000

Insurance is paid on an annualbasis, in November of each year.

The company plans to purchase$16,500 in new equipment during May and $41,000 in new equipmentduring June; both purchases will be for cash. The company declaresdividends of $15,750 each quarter, payable in the first month ofthe following quarter.

Alisting of the company’s ledger accounts as of March 31 is givenbelow:

Assets
Cash	$	75,000
Accounts receivable($28,820 February sales; $353,760 Marchsales)		382,580
Inventory		106,928
Prepaidinsurance		21,500
Property andequipment (net)		960,000
Total assets	$	1,546,008
Liabilities and Stockholders’ Equity
Accountspayable	$	101,000
Dividendspayable		15,750
Common stock		820,000
Retainedearnings		609,258
Total liabilitiesand stockholders’ equity	$	1,546,008

The company maintains a minimumcash balance of $51,000. All borrowing is done at the beginning ofa month; any repayments are made at the end of a month.

The company has an agreement witha bank that allows the company to borrow in increments of $1,000 atthe beginning of each month. The interest rate on these loans is 1%per month and for simplicity we will assume that interest is notcompounded. At the end of the quarter, the company would pay thebank all of the accumulated interest on the loan and as much of theloan as possible (in increments of $1,000), while still retainingat least $51,000 in cash.

Required:

1.	A cash budget. Show the budget by month and in total.(Cash deficiency, repayments and interest should beindicated by a minus sign.)

2.	A budgeted income statement for the three-month period endingJune 30. Use the contribution approach.

3.	A budgeted balance sheet as ofJune 30.