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.