[The following information applies to the questionsdisplayed below.]

“We really need to get this new material-handling equipment inoperation just after the new year begins. I hope we can finance itlargely with cash and marketable securities, but if necessary wecan get a short-term loan down at MetroBank.” This statement byBeth Davies-Lowry, president of Intercoastal Electronics Company,concluded a meeting she had called with the firm’s top management.Intercoastal is a small, rapidly growing wholesaler of consumerelectronic products. The firm’s main product lines are smallkitchen appliances and power tools. Marcia Wilcox, Intercoastal’sGeneral Manager of Marketing, has recently completed a salesforecast. She believes the company’s sales during the first quarterof 20x1 will increase by 10 percent each month over the previousmonth’s sales. Then Wilcox expects sales to remain constant forseveral months. Intercoastal’s projected balance sheet as ofDecember 31, 20x0, is as follows:

Cash	$	35,000
Accounts receivable		405,000
Marketable securities		25,000
Inventory		231,000
Buildings and equipment (net of accumulated depreciation)		545,000
Total assets	$	1,241,000
Accounts payable	$	264,600
Bond interest payable		3,125
Property taxes payable		2,400
Bonds payable (5%; due in 20x6)		150,000
Common stock		500,000
Retained earnings		320,875
Total liabilities and stockholders’ equity	$	1,241,000

Jack Hanson, the assistant controller, is now preparing amonthly budget for the first quarter of 20x1. In the process, thefollowing information has been accumulated:

1. Projected sales for December of 20x0 are $600,000. Credit salestypically are 75 percent of total sales. Intercoastal’s creditexperience indicates that 10 percent of the credit sales arecollected during the month of sale, and the remainder are collectedduring the following month.

2. Intercoastal’s cost of goods sold generally runs at 70 percentof sales. Inventory is purchased on account, and 40 percent of eachmonth’s purchases are paid during the month of purchase. Theremainder is paid during the following month. In order to haveadequate stocks of inventory on hand, the firm attempts to haveinventory at the end of each month equal to half of the nextmonth’s projected cost of goods sold.

3. Hanson has estimated that Intercoastal’s other monthly expenseswill be as follows:

   Sales salaries	$	30,000
   Advertising and promotion		16,000
   Administrative salaries		30,000
   Depreciation		25,000
   Interest on bonds		625
   Property taxes		600

   In addition, sales commissions run at the rate of 3 percent ofsales.

4. Intercoastal’s president, Davies-Lowry, has indicated that thefirm should invest $105,000 in an automated inventory-handlingsystem to control the movement of inventory in the firm’s warehousejust after the new year begins. These equipment purchases will befinanced primarily from the firm’s cash and marketable securities.However, Davies-Lowry believes that Intercoastal needs to keep aminimum cash balance of $15,000. If necessary, the remainder of theequipment purchases will be financed using short-term credit from alocal bank. The minimum period for such a loan is three months.Hanson believes short-term interest rates will be 10 percent peryear at the time of the equipment purchases. If a loan isnecessary, Davies-Lowry has decided it should be paid off by theend of the first quarter if possible.

5. Intercoastal’s board of directors has indicated an intention todeclare and pay dividends of $75,000 on the last day of eachquarter.

6. The interest on any short-term borrowing will be paid when theloan is repaid. Interest on Intercoastal’s bonds is paidsemiannually on January 31 and July 31 for the preceding six-monthperiod.

7. Property taxes are paid semiannually on February 28 and August31 for the preceding six-month period.

Required:

Prepare Intercoastal Electronics Company’s master budget for thefirst quarter of 20x1 by completing the following schedules andstatements.