Page 912 - Accounting Principles (A Business Perspective)

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Federal income taxes are budgeted at 40 per cent of the income before federal income taxes. The taxes should be
accrued, and no payments are due in the first quarter.
a. Prepare a planned operating budget for the quarter ending 2011 March 31, including supporting schedules for

planned purchases and operating expenses.
b. Prepare a financial budget for 2011 March 31. Supporting schedules should be included that (1) analyze
accounts credited for purchases and operating expenses, (2) show planned accounts receivable collections and
balance, and (3) show planned cash flows and cash balance.
c. Will Jackson be able to collect the USD 120,000 on his note?
Davis Corporation is a rapidly expanding company. The company's post-closing balance as of 2010 December
31, is as follows:

Davis corporation
Post-closing trial
balance
2010 December 31
Debits Credits
Cash $240,000
Accounts receivable 480,000
Allowance for uncollectible $ 36,000
accounts
Inventories 600,000
Prepaid expenses 72,000
Land 600,000
Buildings and equipment 1,800,000
Accumulated depreciation 240,000
– Buildings and equipment
Accounts payable 360,000
Accrued liabilities payable 240,000
(including income taxes)
Capital stock 2,400,000
Retained earnings 516,000
$3,792,000 $3,792,000
Sales in the last quarter of 2010 amounted to USD 2,400,000 and are projected at USD 3,000,000 and USD
4,800,000 for the first two quarters of 2011. This expansion has created a need for cash. Management is especially
concerned about the probable cash balance of 2011 March 31, since a payment of USD 360,000 for some new
equipment must be made on delivery on April 2. The current cash balance of USD 240,000 is considered to be the
minimum workable balance.
Purchases, all on account, are to be scheduled so that the inventory at the end of any quarter is equal to one-
third of the goods expected to be sold in the coming quarter. Cost of goods sold averages 60 per cent of sales.
Selling expenses are budgeted at USD 120,000 plus 8 per cent of sales; USD 24,000 is expected to be incurred

on account, USD 288,000 accrued, USD 33,600 from expired prepayments, and USD 14,400 from allocated
depreciation.
Purchasing expenses are budgeted at USD 84,000 plus 5 per cent of purchases; USD 12,000 will be incurred on
account, USD 156,000 accrued, USD 13,200 from expired prepayments, and USD 10,800 from allocated
depreciation.
Administrative expenses are budgeted at USD 150,000 plus 3 per cent of sales; USD 24,000 will be incurred on
account, USD 132,000 accrued, USD 13,200 from expired prepayments, and USD 10,800 from allocated

depreciation.

Accounting Principles: A Business Perspective 913 A Global Text