Master Budget Problem
The Observer Company is a small, rapidly growing wholesaler of consumer
electronic products including small kitchen appliances and power tools. A sales
forecast supplied by the Marketing Department predicts that sales during Quarter
1 of 20×2 will increase by 10% each month over the previous monthâs sales. Then
(beginning in April 20×2) sales are expected to remain constant for the next
several months. The Company is going to put some new equipment in operation
just after the New Year begins. They hope to finance it largely with cash and
the sale of marketable securities, but if necessary they can get a short-term
loan from the Karch Bank. Observerâs Balance Sheet at December 31, 20×1 is as
Company- Balance Sheet – 31-Dec-20×1
Building & Equipment (net of accumulated
Liabilities and Stockholder’s Equity:
Bond interest payable
Property taxes payable
Bonds payable (due in 20×6)
Total L & SE
As Assistant Controller for the
Observer Company you are now preparing a monthly budget for Quarter 1 of 20×2.
In this process, the following information has been accumulated:
(1) Projected Sales for December
20×1 are $400,000. Credit sales typically are 75% of total sales. Observerâs
credit experience indicates that 10% of credit sales are collected during the
month of sale, and the remainder is collected during the following month.
(2) Observerâs cost of goods
sold is normally 70% of sales. Inventory is purchased on account and 40% of
each monthâs purchases are paid during the month of purchase. The remainder is
paid during the following month. To have adequate amounts of inventory on hand
Observer has a policy that inventory at the end of each month should equal half
of the next monthâs projected cost of goods sold.
(3) Observerâs other monthly
expenses are estimated as follows:
Sales Salaries $21,000
Advertising & promotion
Administrative salaries $21,000
Depreciation $25,000 (Includes depreciation on new
equipment purchased at beginning of
Interest on Bonds $2,500
Property taxes $900
Sales Commissions — 1
percent of current monthâs sales
(4) The Company President has indicated that Observer will be investing
$125,000 in equipment to be used in the firmâs warehouse just after the New
Year begins. This equipment purchase will be financed from the companyâs cash
and marketable securities. However, the President noted that Observer should
keep a minimum cash balance of $25,000. If necessary, the remainder of the
equipment purchased will be financed using short-term credit from the Karch
Bank. The minimum period for such a loan is 3 months with short-term interest
rates being 10% per year. If a loan is needed the President has decided that it
should be paid off at the end of the Quarter 1, if possible.
(5)Observerâs Board of
Directors has indicated an intention to declare and pay cash dividends of $50,000
on the last day of each quarter.
(6)The interest on any
short-term borrowing will be paid when the loan is repaid. Interest on
Observerâs Bonds is paid semiannually on January 31 and July 31 for the
preceding six-month period.
(7)Property taxes are paid semi-annually
on February 28 and August 31 for the preceding six-month period.
Required: Complete the Observer
Companyâs Master Budget for Quarter 1 of 20×2 using the Excel spreadsheet provided.