Near the end of 2014, the management of Babalu Musical Instrument Co., a new merchandising company,
prepared the following estimated balance sheet for December 31, 2014.
BABALU MUSICALINSTRUMENT COMPANY
Estimated Balance Sheet
December 31, 2014
Liabilities and Equity
Bank loan payable
Taxes payable (due
Total current assets
Total stockholders' equity
Total liabilities and equity
To prepare a master budget for January, February, and March of 2015, management gathers the following
a. Babalu Musical's single product is purchased for $20 per unit and resold for $56 per unit. The expected
inventory level of 4,750 units on December 31, 2014, is more than management's desired level for 2015, which
is 20% of the next month's expected sales (in units). Expected sales are: January, 7,500 units; February, 9,000
units; March, 10,500 units; and April, 9,500 units
b. Cash sales and credit sales represent 25% and 75% respectively, of total sales. Of the credit sales, 68% is
collected in the first month after the month of sale and 32% in the second month after the month of sale. For the
December 31, 2014, accounts receivable balance, $125,000 is collected in January and the remaining $395,000
is collected in February.
c. Merchandise purchases are paid for as follows: 20% in the first month after the month of purchase and 80% in
the second month: after the month of purchase. For the December 31, 2014, accounts payable balance, $85,000 is
paid in January and the remaining $290,000 is paid in February
d. Sales commissions equal to 20% of sales are paid each month. Sales salaries (excluding commissions) are
$84,000 per year.
e. General and administrative salaries are $156,000 per year. Maintenance expense equals $2,100 per month and is
paid in cash.
f. Equipment reported in the December 31, 2014, balance sheet was purchased in January 2014. It is being
depreciated over eight years under the straight-line method with no salvage value. The following amounts for
new equipment purchases are planned in the corning quarter: January, $35,000; February, $97,000; and March,
$28,500. This equipment will be depreciated under the straight-line method over eight years with no salvage
value. A full month's depreciation is taken for the month in which equipment is purchased.
g. The company plans to acquire land at the end of March at cost of $180,000, which will be paid with cash on
the last day of the month.
h. Babalu Musical has a working arrangement with its bank to obtain additional loans as needed. The interest rate
is 12% per year, and interest is paid at each month-end based on the beginning balance. Partial or full payments
on these loans can be made on the last day of the month. The company has agreed to maintain a minimum
ending cash balance of $25,250 in each month.
i. The income tax rate for the company is 32%. Income taxes on the first quarter's income will not be paid until
Prepare a master budget for each of the first three months of 2015; include the following component
budgets (show supporting calculations as needed directly behind that budget, and round amounts to
the nearest dollar):
1.) Monthly sales budgets (showing both budgeted unit sales and dollar sales).
2.) Monthly merchandise purchases budgets.
3.) Monthly selling expense budgets.
4.) Monthly general and administrative expense budgets.
5.) Monthly capital expenditures budgets. This will not be in your text so find other sources.
6.) Monthly cash budgets.
7.) Budgeted income statement for the entire first quarter (not for each month).
8.) Budgeted balance sheet as of March 31, 2015
9.) Prepare a written analysis summarizing your findings. Please include:
i.) Financial ratios in your discussion of the company's financial position.
ii.) What accounting recommendations do you have for the new company?
iii.) What business recommendations do you have to help the new company?
iv.) What did you leam from preparing a Master Budget? Do you find this to be an easy or
challenging project? Why?
v.) Do you feel you could prepare a master budget for a company on your own?
Reports should be neatly compiled in the above order and include a cover page with all team member
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.