Buad $195$

Chapter $4$ Master Budget Assignment

Winter $2024$

Page $1$ of $3$

You are the sole shareholder and operator of a small, incorporated business that purchases children's remote$-$controlled $($RC$)$ cars and sells them to retailers $($ie$.$ toy stores$).$ The following data have been assembled to assist in the preparation of the master budget for the first quarter $($January$,$ February and March$)$ of $2024.$

As of December $31,2023$ your company had the following balance sheet:

Your Company $($make up a name$)$

Balance Sheet

December $31,2023$

$\backslash$table$[[$Cash$,$$$,20,000,$Accounts payable,$$,28,035],[$Accounts receivable,,$22,660,$Taxes payable,,$4,500],[$Inventory$,,18,480,$ST loan payable,,$6,000],[$Prepaid insurance,,$14,000,$Total current liabilities,,$38,535],[$Total current assets,,$75,140,$LT loan payable,,$25,000],[\backslash$table$[[$Equipment$],[$Accumulated$]],,40,000,$Total liabilities,,$63,535],[$depreciation$,,15,000,$Common shares$*,,33,000],[$Net equipment,,$25,000,$Retained earnings,,$3,605],[$Total assets,$$,100,140,\backslash$table$[[$Total liabilities and$],[$equity$]],$$$,100,140]]$

A$.$ The company sells each RC car for $$220.$ Actual sales for November $2023$ were $250$ units and actual sales for December $2023$ were $260.$ It is expected that sales will increase by $4\%$ per month until May $2024.$

B$.70\%$ of the cash for sales is collected in the month of sale, $20\%$ is collected in the following month, and the remaining $10\%$ is collected in the month after that. For simplicity, all sales taxes will be ignored.

C$.$ The company purchases enough units each month to cover the current month's sales and maintain an ending inventory equal to $65\%$ of the following month's projected sales. Each unit costs the company $$105.$ Inventory purchases are paid for in the month following the purchase.

D$.$ The company is expected to incur fixed operating expenses of $$5,000$ per month and variable operating expenses equal to $9\%$ of sales for the month. Operating expenses are paid for in the month incurred.

E$.$ Monthly interest is paid on the long$-$term loan at a rate of $5\%$ per annum. At the end of March, a payment of $$2,500$ will be made on the principal of the loan.

F$.$ On August $1,2023,$ the company paid $$24,000$ for one year's insurance coverage $($August $2023$ to July $2024).$

G$.$ Equipment costing $$14,000$ will be purchased and paid for at the beginning of January. All equipment $($existing and new$)$ is depreciated on a straight$-$line basis over $15$ years with no residual value.

H$.$ The company will issue $110$ additional common shares and sell them to your uncle for $$42\mathrm{.}00$ per share at the end of March $2024.$

I. The company pays salaries totalling $$18,000$ each month. For simplicity, ignore all payroll tax implications.

J$.$ The company will declare and pay a dividend of $$3,000$ at the beginning of March $2024.$

K$.$ Income tax expense for this small business is calculated at $25\%$ of the earnings before taxes. The company pays income tax instalments of $$1,700$ per month.

L$.$ The company must maintain a minimum cash balance of $$20,000.$ A short$-$term loan is available to cover any shortfall. Interest is paid monthly on the previous month's loan balance at a rate of $6\%$ per annum. Any cash above $$20,000$ available at month$-$end is used to reduce any existing short$-$term loan.