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Facts: The Observer Company is a small, rapidly growing wholesaler of consumer electronic products including small kitchen appliances and power tools. A sales forecast supplied by the Marketing Department predicts that sales during Quarter $1$ of $20$x$2$ will increase by $10\%$ each month over the previous month$$s sales. Then $($beginning in April $20$x$2)$ sales are expected to remain constant for the next several months. The Company is going to put some new equipment in operation just after the New Year begins. They hope to finance it largely with cash and the sale of marketable securities$,$ but if necessary they can get a short$-$term loan from the Karch Bank. Observer$$s Balance Sheet at December $31,20$x$1$ is as follows:

Observer Company$-$ Balance Sheet $-31-$Dec$-20$x$1$

Assets:

Cash $ $35,000$

Accounts Receivable $270,000$

Marketable securities $15,000$

Inventory $154,000$

Building $($net of accumulated depreciation$)626,000$

Total Assets $1,100,000$

Liabilities and Stockholder's Equity:

Accounts payable $ $176,400$

Bond interest payable $12,500$

Property taxes payable $3,600$

Bonds payable $($due in $20$x$6)300,000$

Common Stock $500,000$

Retained Earnings $ $107,500$

Total L & SE $ $1,100,000$

As Assistant Controller for the Observer Company you are now preparing a monthly budget for Quarter $1$ of $20$x$2.$ In this process, the following information has been accumulated:

$(1)$ Projected Sales for December $20$x$1$ are $$400,000.$ Credit sales typically are $75\%$ of total sales. Observer$$s credit experience indicates that $10\%$ of credit sales are collected during the month of sale, and the remainder is collected during the following month.

$(2)$ Observer$$s cost of goods sold is normally $70\%$ of sales. Inventory is purchased on account and $40\%$ of each month$$s purchases are paid during the month of purchase. The remainder is paid during the following month. To have adequate amounts of inventory on hand Observer has a policy that inventory at the end of each month should equal half of the next month$$s projected cost of goods sold.

$(3)$ Observer$$s other monthly expenses are estimated as follows:

Sales Salaries $$21,000$

Advertising & promotion $$16,000$

Administrative salaries $$21,000$

Depreciation $$25,000($Includes depreciation on new equipment purchased at beginning of Quarter $1)$

Interest on Bonds $$2,500$

Property taxes $$900$

Sales Commissions $---1$ percent of current month$$s sales

$(4)$ The Company President has indicated that Observer will be investing $$125,000$ in equipment to be used in the firm$$s warehouse just after the New Year begins. This equipment purchase will be financed from the company$$s cash and marketable securities$.$ However, the President noted that Observer should keep a minimum cash balance of $$25,000.$ If necessary, the remainder of the equipment purchased will be financed using short$-$term credit from the Karch Bank. The minimum period for such a loan is $3$ months with short$-$term interest rates being $10\%$ per year. If a loan is needed the President has decided that it should be paid off at the end of the Quarter $1.$

$(5)$ Observer$$s Board of Directors has indicated an intention to declare and pay cash dividends of $$50,000$ on the last day of each quarter.

$(6)$ The interest on any short$-$term borrowing will be paid when the loan is repaid. Interest on Observer$$s Bonds is paid semiannually on January $31$ and July $31$ for the preceding six$-$month period.

$(7)$ Property taxes are paid semi$-$annually on February $28$ and August $31$ for the preceding six$-$month period.

Required: Prepare Observer Company$$s Master Budget for Quarter $1$ of $20$x$2$ using the Excel spreadsheet provided. Sales Budget

$20$x$120$x$2$

December January February March Quarter $1$

Total Sales $$400,000$ $$440,000$

Credit Sales $300,000330,000$

Cash Sales $$100,000$ $$110,000$

Cash Receipts Budget

$20$x$2$

January February March Quarter $1$

Cash Sales $$110,000$

Cash collections$-$current

month's credit sales $33,000$

Cash collections$-$previous

month's credit sales $270,000$

Total Cash Receipts $$413,000$

Inventory Purchases Budget

$20$x$120$x$2$

December January February March Quarter $1$

Budgeted CGS $$280,000$ $$308,000$

Add:Desired Ending Inv. $154,000169,400$

Total goods needed $434,000477,400$

Less: Expected Begin Inv. $140,000154,000$

Purchases $$294,000$ $$323,400$

Cash Disbursements $($CD$)$ Budget

$20$x$2$

January February March Quarter $1$

Inventory Purchases:

CDs for current month purchases $$129,360$

CDs for previous month purchases $$176,400$

Total CDs for inventory purchases $$305,760$

Other Expenses:

Sales salaries $$21,000$

Advertising & promotion $16,000$

Administrative salaries $21,000$ Will send the rest in another post

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