Gold Sporting Equipment (GSE) is in the process of preparing its budget for the third quarter of 2010. The budgeting staff has gathered the following data:

1. Account balances as of June 30:

3. Sales are 80 percent cash and 20 percent on credit. Credit accounts are all collected 30 days after sale.

4. At gross purchase prices of inventories, GSE's gross margin averages 40 percent of revenues. GSE records all inventory purchases net of available purchase discounts.

5. Operating expenses: Salaries and wages, $8,000 per month plus 5 percent of revenue; rent and property tax, $1,000 per month; other operating expenses, excluding depreciation, 2 percent of revenues; depreciation $800 per month. All cash operating expenses in a month are paid before the end of the month.

6. GSE has no minimum inventory requirement. The policy is to purchase each month on the 15th the expected sales (@ cost) for the following month. Terms of purchases are 1/10, n/30. Purchases usually arrive on or before the 20th. GSE's policy is to take all cash discounts offered.

7. GSE is negotiating the purchase of new equipment for $127,000 to be installed in September. Terms are 50 percent in the month before and 50 percent after the month of installation.

8. Minimum cash balance is $30,000. All borrowings are effective at the beginning of the month and all repayments are made at the end of the month of repayment. Loans are repaid when sufficient cash is available. The interest rate is 15 percent per year, payable at the end of each month. Both borrowings and repayments are in multiples of $10,000. Management does not want to borrow any more cash than is necessary and wants to repay whenever the cash on hand exceeds the minimum requirement.

9. GSE plans to pay no dividend to stockholders.

Required

1. Complete schedules A through E.

2. Prepare a budgeted income statement for the third quarter and beginning and end-of-quarter balance sheets. GSE estimates its income tax rate at 25 percent, payable in the second quarter of the following year.
3. Gold Sporting Equipment has been using the loan described in Item 8 to meet its needs for funds. Alternatively, Gold can issue long-term bonds at no more than 12 percent annual interest rate to increase funds available for operations. What is the most sensible type of loan GSE should use to meet its needs? Explain your reasoning.
4. The underlying business situation has been greatly simplified. List at least three complicating factors that may exist in a real business setting.

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Account balances, June 30th Cash A/R Inventory Monthly Operating Expenses Recent and forecasted sales $75,000 June (actual) $25,000 Fixed: Salaries & wages $15,000 S80,000 $8,000 July August September Rent/Property Taxes Depreciation $82,000 $47,520 $1,000 Bldg./Equip (net) Short-term payable (equip) Bank loan payable $800 S200,000 S90,000 S100,000 so October Variable: $O 5% Salaries & wages Income taxes payable SO Sales Breakdown (on average): Other cash oper. Expenses Cash 80% 25% Credit Income tax rate (combined) 20% (ALL collected in month following sale) Gross margin % 40% (based on gross, not net, purchase price) Purchases Information: Each month, on the 15th, purchases equal the following month's projected sales (@ COST) Terms of purchase, 1/10, n/30 ("1% discount if paid within 10 days; net amount is due in 30 days") Purchases discount 1% % of purchases for which the "early payment" discount is taken 100% Planned equipment purchase, August: Cash-related information: S30,000 Cost S127,000 Minimum cash balance % paid Aug. Interest rate/year Borrowing/Repayments Borrowings occur @ BOM, repayments occur EOM (paid EOM) 50% 15% $10,000 % paid Oct. 50% increments