Comprehensive master budget in a retail setting – Joseph A. Knab

Comprehensive master budget in a retail setting (LO 3, 4, 5) Joseph A. Knab distributes men’s suits in 
the Southwest. The following information was gathered to prepare the budget for the third quarter of 
2011. 
• Suits are budgeted to sell for an average price of $225. Unit sales are expected to be as follows: 
June 4,000 suits 
July 4,500 suits 
August 4,700 suits 
September 4,600 suits 
October 4,600 suits 
• Sales are made for cash and on credit. The following collection pattern is used to estimate monthly 
cash collections: 
Cash sales 41% 
Credit sales—month of sale 35 
Credit sales—month after sale 20 
Uncollectible 4 
Total 100% 
• The company tries to maintain an inventory of 25 percent of the following month’s sales. The 
company expects to have 1,125 suits on hand on June 30, 2011. Knab pays an average of $146 per 
suit. 
• The company pays for 70 percent of its purchases in the month of purchase and the remaining 30 
percent in the month after purchase. 
• The following monthly selling and administrative expenses are planned for the quarter, though 
advertising will have a one‐time $30,000 increase in August. 
Fixed Overhead Variable Cost/Unit 
Depreciation $ 9,000 
Rent 40,000 
Advertising 84,000 
Salaries 150,000 
Bad debts $9.00 
• On September 30, the company plans to purchase $45,000 of new office equipment. However, no 
additional depreciation will be recorded in the third quarter. 
• Knab wants to maintain a minimum cash balance of $20,000. An open line of credit at a local 
bank allows the company to borrow up to $100,000 per quarter in $1,000 increments. 
• All borrowing is done at the beginning of the month, and all repayments are made at the end of a 
month in $1,000 increments. Accrued interest is paid only when principal is repaid. The interest 
rate is 12 percent per year. 
• Accrued expenses from the second quarter will be paid in July. 
• Knab’s tax rate is 30 percent. 
• The June 30, 2011 balance sheet is budgeted as follows: 
June 30 
Cash $ 21,000 
Accounts receivable 180,000 
Inventory 164,250  
Plant & equipment 540,000  
Accumulated depreciation (135,000) 
Total assets $770,250  
Accounts payable $175,000  
Accrued expenses 75,000  
Common stock 300,000  
Retained earnings 220,250  
Total liabilities and equities $770,250  
Required 
a. Prepare all components of Knab’s master budget for the third quarter of 2011. 
b. Prepare a pro‐forma income statement for the third quarter of 2011. 
c. Prepare a pro‐forma balance sheet as of September 30, 2011.