The following data relate to the operations of Lim Corporation, a wholesale distributor of consumer goods:

Current assets as of December 31:

Cash……………………….                                      $6,000

Accounts receivable……………                       $36,000

Inventory……………………                                  $9,800

Buildings and equipment, net ………         $110,885

Accounts payable ………………                       $32,550

Common shares………………..                      $100,000

Retained earnings ………………                      $30,135

a. The gross margin is 30% of sales. (In other words, cost of goods sold is 70% of sales.)

b. Actual and budgeted sales data are as follows:

December (actual) ……                                $60,000

January …………..                                          $70,000

February…………..                                          $80,000

March…………….                                             $85,000

April ……………..                                              $55,000

c. Sales are 40% for cash and 60% on credit. Credit sales are collected in the month following sale. The accounts receivable at December 31 are the result of December credit sales.

d. Each month’s ending inventory should equal 20% of the following month’s budgeted cost of goods sold.

e. One-quarter of a month’s inventory purchases is paid for in the month of purchase; the other three-quarters is paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory.

f. Monthly expenses are as follows: commissions, $12,000; rent, $1,800; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $2,400 for the quarter and includes depreciation on new assets acquired during the quarter.

g. Equipment will be acquired for cash: $3,000 in January and $8,000 in February.

h. Management would like to maintain a minimum cash balance of $5,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $ 1,000 at the beginning of each month, up to a total loan balance of $50,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.

Required:

Using the data above:

1. Complete the following schedule:

                                                            Schedule of Expected Cash Collections

                                                            January         February       March                        Quarter

Cash sales                                        $28,000      32,000          34,000                94,000          

Credit sales                                          36,000         42,000          48,000              126,000         

Total collections                               $64,000         74,000         82,000               220,000         

2. Complete the following:

Merchandise Purchasing Budget

                                                            January    February           March                        Quarter

Budgeted cost of goods sold      $49,000           56,000               59,500            164,500           

Add desired ending inventory     11,200**           11,900            7,700              7,700             

Total needs                                       $60,200         67,900            67,200            172,200         

Less beginning inventory                  9,800         11,200         11,900               9,800 

Required purchases                                   $50,400         56,700            55,300            162,400                                 

* $70,000 sales X 70% – $49,000.

** $80,000 X 70% X 20% – $11,200.

Schedule of Expected Cash Disbursements – Merchandise Purchases

                                                            January         February       March                        Quarter

December purchases                      $32,550*                                                       $32,550

January purchases                            12,600         $37,800                                    50,400

February purchases                                                                                                           

March purchases                                                                                                                

Total disbursements                        $45,150                                                                                 * Beginning balance of the accounts payable 

3. Complete the following schedule:

Schedule of Expected Cash Disbursements –

Selling and Administrative Expenses

                                                            January         February       March                        Quarter

Commissions……………..                   $12,000          12,000        12,000           36,000                

Rent …………………….                 1,800          1,800          1,800              5,400

Other expenses …………….                   5,600          *6,400         6,800              18,800   

Total disbursements …………           $19,400       20,200          20,600             60,200  

*Other expenses 80000*.08=6400

4. Complete the following cash budget:

                                                            January         February       March                        Quarter

Cash balance, beginning ………    $ 6,000

Add cash collections …………          64,000                                                                      

Total cash available ………….          70,000

Less cash disbursements:

For inventory …………….                   45,150

For operating expenses ……..         19,400

For equipment ……………                    3,000                                                                                  

Total cash disbursements ……..     67,550                                                                                  

Excess (deficiency) of cash ……..$  2,450                                                                                   

Financing

5. Prepare an absorption costing income statement, similar to the one shown in

Chapter 8, for the quarter ended March 31.

Sales                                                                       235,000

Less: COGS                                                            164,500                

Gross margin                                                           70,500

Less: selling and administration expenses             60,200

Operating income                                                   10,300

6. Prepare a balance sheet as of March 31.