Klandon  Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the  quarter ended June 30. She has gathered the following information.

1. Klandon’s sales manager reported that the company sold 15,000 bags of rocks in March. He has  developed the following sales forecast. The expected sales price is $25 per bag.

April       . . . . . . . . . . 18,000 bags

May       . . . . . . . . . .22,000 bags

June       . . . . . . . . . .20,000 bags

July       . . . . . . . . . .24,000 bags

August . . . . . . . . . .16,000 bags

2. Sales personnel receive a 4% commission on every bag of rocks sold. The following monthly fixed selling and administrative expenses are planned for the quarter. However, these amounts do not include  the depreciation increase resulting from the budgeted equipment purchase in June.

3. After experiencing difficulty in supplying customers in a timely fashion due to inventory shortages,  the company established a policy requiring the ending Finished Goods Inventory to equal 20% of the  following month’s budgeted sales, in units. On March 31, 4,000 bags were on hand.

4. Eight pounds of direct materials are required to fill each bag of finished rocks. The company wants  to have direct materials on hand at the end of each month equal to 10% of the following month’s production needs. On March 31, 13,000 pounds of materials were on hand.

5. The direct materials used in production cost $1.25 per pound. Sixty percent of the month’s purchases are paid for in the month of purchase; the remaining 40%, in the following month. No discount is available.

6. The standard labor allowed for one bag of rocks is 30 minutes. The current direct labor rate is $12  per hour.

7. On June 1, the company plans to spend $60,000 to upgrade its office equipment that is fully depreciated. The new equipment is expected to have a five-year life, with no residual value. While fulldepreciated, the old equipment will be retained in service.

8. The budgeted monthly variable and fixed overhead amounts are as follows. Variable overhead is  based on the number of units produced. The fixed overhead budget is based on an annual production of 420,000 bags.

9. All sales are made on account. Historically, the company has collected 70% of its sales in the month  of sale and 25% in the month following the sale. The remaining 5% of sales is uncollectible (and is  included in the previous selling and administrative bad debt expense information).

10. Klandon must maintain a minimum cash balance of $40,000. An open line of credit at a local bank  allows the company to borrow up to $175,000 per quarter in $1,000 increments.

11. 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 any time a principal payment is made. The  interest rate is 12% per year.

12. A quarterly dividend of $53,000 will be declared and paid in April.

13. Income taxes payable for the first quarter will be paid on April 15. Klandon’s tax rate is 30%.

14. The March 31 balance sheet is as follows:

                                                                                                March 31

Cash                                          . . . . . . . . . . . . . . . . . . . . .     $40,000

Accounts receivable               . . . . . . . . . . . . . . . . . . . . .        93,750

Raw materials inventory       . . . . . . . . . . . . . . . . . . . . .         21,600

Finished goods inventory      . . . . . . . . . . . . . . . . . . . . .         73,000

Plant & equipment                 . . . . . . . . . . . . . . . . . . . . .        200,000

Accumulated depreciation     . . . . . . . . . . . . . . . . . . . . .       (50,000)

Total assets                               . . . . . . . . . . . . . . . . . . . . .      $378,350

Accounts payable                      . . . . . . . . . . . . . . . . . . . . .     $  12,000

Income taxes payable              . . . . . . . . . . . . . . . . . . . . .          24,000

Common stock                           . . . . . . . . . . . . . . . . . . . . .         52,000

Retained earnings                      . . . . . . . . . . . . . . . . . . . . .       290,350

Total liabilities and equities      . . . . . . . . . . . . . . . . . . . . .     $378,350

Required

a. Prepare all components of Klandon’s master budget for the second quarter.

b. Prepare a pro-forma income statement for the second quarter.

c. Prepare a pro-forma balance sheet as of June 30.

Transcribed Image Text:

Monthly Fixed Selling and Administrative Costs Variable Cost/Unit $10,000 Depreciation Salaries of sales personnel Advertising Management salaries 25,000 $1.00 1,000 10,000 Miscellaneous 500 Bad debts Total costs $46,500 $1.00