Question

Colerain Corporation is a merchandising company that is preparing a profit plan for the third quarter of the calendar year. The company’s balance sheet as of June 30 is shown below: Colerain Corporation Balance Sheet June 30 Assets Cash $ 85,000 Accounts receivable 126,000 Inventory 56,350 Plant and equipment, net of depreciation 200,000 Total assets $ 467,350 Liabilities and Stockholders’ Equity Accounts payable $ 61,100 Common stock 360,000 Retained earnings 46,250 Total liabilities and stockholders’ equity $ 467,350 Colerain’s managers have made the following additional assumptions and estimates: 1. Estimated sales for July, August, September, and October will be $230,000, $250,000, $240,000, and $260,000, respectively. 2. All sales are on credit and all credit sales are collected. Each month’s credit sales are collected 30% in the month of sale and 70% in the month following the sale. All of the accounts receivable at June 30 will be collected in July. 3. Each month’s ending inventory must equal 35% of the cost of next month’s sales. The cost of goods sold is 70% of sales. The company pays for 50% of its merchandise purchases in the month of the purchase and the remaining 50% in the month following the purchase. All of the accounts payable at June 30 will be paid in July. 4. Monthly selling and administrative expenses are always $60,000. Each month $4,000 of this total amount is depreciation expense and the remaining $56,000 relates to expenses that are paid in the month they are incurred. 5. The company does not plan to borrow money or pay or declare dividends during the quarter ended September 30. The company does not plan to issue any common stock or repurchase its own stock during the quarter ended September 30. Required: 1. Prepare a schedule of expected cash collections for July, August, and September. Also compute total cash collections for the quarter ended September 30th.(Do not round intermediate calculations. 2a. Prepare a merchandise purchases budget for July, August, and September. Also compute total merchandise purchases for the quarter ended September 30th.(Do not round intermediate calculations.) 2b. Prepare a schedule of expected cash disbursements for merchandise purchases for July, August, and September. Also compute total cash disbursements for merchandise purchases for the quarter ended September 30th. (Do not round intermediate calculations.) 3. Prepare an income statement for the quarter ended September 30th.(Do not round intermediate calculations.) 4. Prepare a balance sheet as of September 30th. (Do not round intermediate calculations.)

Answer 1

1.

Schedule of Expected Cash Collections
	July	August	September	Quarter
Collection of:
June accounts receivable	126000			126000
July sales	69000	161000		230000
August sales		75000	175000	250000
September sales			72000	72000
Total cash collections $	195000	236000	247000	678000

2a.

Merchandise Purchases Budget
	July	August	September	Quarter
Budgeted cost of goods sold*	161000	175000	168000	504000
Add: Ending inventory**	61250	58800	63700	63700
Total needs	222250	233800	231700	567700
Less: Beginning inventory	56350	61250	58800	56350
Required purchases $	165900	172550	172900	511350

*Budgeted cost of goods sold = 70% of sales

**Ending inventory = 35% of next month's budgeted cost of goods sold

2b.

Schedule of Expected Cash Disbursements for Merchandise Purchases
	July	August	September	Quarter
Disbursement of:
June accounts payable	61100			61100
July purchases	82950	82950		165900
August purchases		86275	86275	172550
September purchases			86450	86450
Total cash disbursements $	144050	169225	172725	486000

3.

Colerain Corporation
Income Statement
For the Quarter Ended September 30
Sales revenue ($230000+250000+240000)	720000
Cost of goods sold (70% x $720000)	504000
Gross profit	216000
Selling and administrative expense ($60000 x 3)	180000
Net income $	36000

4.

Colerain Corporation
Balance Sheet
September 30
Assets
Cash [$85000+678000-486000-($56000 x 3)]	109000
Accounts receivable (70% x $240000)	168000
Inventory	63700
Plant and equipment, net [$200000 - ($4000 x 3)]	188000
Total assets $	528700
Liabilities and Stockholders' Equity
Accounts payable (50% x $172900)	86450
Common stock	360000
Retained earnings ($46250 + 36000)	82250
Total liabilities and stockholders' equity $	528700