Joseph A. Knab distributes mens suits in the Southwest. The following information was gathered to prepare the
Question:
Joseph A. Knab distributes men’s suits in the Southwest. The following information was gathered to prepare the budget for the third quarter.
• Suits are budgeted to sell for an average price of $225. Unit sales are expected to be as follows: June 4,000 suits July 4,500 suits August 4,700 suits September 4,600 suits October 4,600 suits
• Sales are made for cash and on credit. The following collection pattern is used to estimate monthly cash collections: Cash sales 41% Credit sales—month of sale 35 Credit sales—month after sale 20 Uncollectible 4 Total 100%
• The company tries to maintain an inventory of 25% of the following month’s sales. The company expects to have 1,125 suits on hand on June 30. Knab pays an average of $146 per suit.
• The company pays for 70% of its purchases in the month of purchase and the remaining 30% in the month after purchase.
• The following monthly selling and administrative expenses are planned for the quarter, though advertising will have a one-time $30,000 increase in August. Fixed Overhead Variable Cost/Unit Depreciation $9,000 Rent 40,000 Advertising 84,000 Salaries 150,000 Bad debts $9.00
• On September 30, the company plans to purchase $45,000 of new office equipment. However, no additional depreciation will be recorded in the third quarter.
• Knab wants to maintain a minimum cash balance of $20,000. An open line of credit at a local bank allows the company to borrow up to $100,000 per quarter in $1,000 increments.
• All borrowing is done at the beginning of the month, and all repayments are made at the end of a month in $1,000 increments. Accrued interest is paid only when principal is repaid. The interest rate is 12% per year.
• Accrued expenses from the second quarter will be paid in July.
• Knab’s tax rate is 30%.
• The June 30 balance sheet is budgeted as follows:
June 30
Cash $21,000
Accounts receivable 180,000
Inventory 164,250
Plant & equipment 540,000
Accumulated depreciation (135,000)
Total assets $770,250
Accounts payable $175,000
Accrued expenses 75,000
Common stock 300,000
Retained earnings 220,250
Total liabilities and equities $770,250
Required
a. Prepare all components of Knab’s master budget for the third quarter.
b. Prepare a pro-forma income statement for the third quarter.
c. Prepare a pro-forma balance sheet as of September 30.
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