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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 Assets Liabilities and Equity Cash $36,500 Accounts payable $375,000 Accounts receivable 520,000 Bank loan payable 15,000 Inventory 95,000 Taxes payable (due 91,000 3/15/2015) Total current assets 651,500 Total liabilities $481,000 Equipment $537,000 Common stock 470,000 Less accumulated 67,125 469,875 depreciation Retained earnings 170,375 Total stockholders' equity 640,375 Total assets $1,121,375 Total liabilities and equity $1,121,375 To prepare a master budget for January, February, and March of 2015, management gathers the following information. 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 April 15. Requirements: 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 names.

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