QUESTION 2 Bell Inc. is a distributor of computer monitors. Julie, the chief con

Bell Inc. is a distributor of computer monitors. Julie, the chief controller of Bell Inc., is
preparing a master budget for the first quarter of 2022.
Below are the accounting records of the last quarter of 2021:
Year-Month Sales
October 2021 $540,000
November 2021 $600,000
December 2021 $400,000
The selling price was $50 per unit. The cost of goods sold was 60% of sales. The net
income after tax was $212,500. The balance of accounts payable as of December 31,
2021 was $70,650. The balance of retained earnings as of December 31, 2021 was
Julie predicts sales in January, February, and March of 2022 to be $420,000, $480,000,
and $540,000, respectively. She also estimates that sales in April and May of 2022
will be 500 units higher than the prior month and sales in June of 2022 will drop by
1,500 units. All sales are on account. The collection pattern remains the same as in
prior years: 50% collected in the month of sale, 40% collected in the first month
following the sale, and the remaining collected in the second month following the sale.
In prior years, Bell Inc. used to keep 15% of the next month’s sales as ending inventory.
Starting from 2022, Bell Inc. plans to maintain 10% of the next two months’ sales as
ending inventory, since the product market demand will likely experience abnormal
fluctuations in the post-pandemic period. Bell Inc. has renewed the purchase
agreement with its long-term supplier, Mountain View Corp., which will continue to sell
computer monitors to Bell Inc. in 2022. As stated in the renewed agreement, Bell Inc.
will pay Mountain View Corp. 80% in the month following the purchase and the
remaining in the second month following the purchase. Given the rising labor cost,
Mountain View Corp. will charge 25% more on each monitor sold. As a result, Bell Inc.
plans to increase its selling price by 20%.
Operating expenses in the first quarter of 2022 are estimated to be the following
(warehouse rent and insurance will be pre-paid at the beginning of the quarter and
other expenses will be paid in the month incurred except for depreciation):
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Advertising $8,000 per month
Shipping $4 per unit sold for the first 5,000 units sold in a month
and $3 per unit sold for any additional units sold in a
Salesperson salary $13,000 per month
Sales commission 5% of monthly sales
Warehouse rent 15,000 per month
Depreciation $2,000 per month
Utilities $2,100 per month
Insurance $800 per month
Office repair $22,500 in January
As usual, income taxes are 15% of pre-tax income and are calculated at the end of
each quarter and due in the first month after the quarter-end. In 2022, Bell Inc. plans
to pay cash dividends of $4,800 in January and $21,500 in February and purchase
two cash register machines, which cost $11,500 per unit and require cash payment.
Bell Inc. has $30,000 cash on hand on December 31, 2021. The company wants to
maintain a minimum cash balance of $25,000. The company maintains a 12% open
line of credit for the amount of $50,000 with Sequoia Bank. The borrowing must be in
increments of $1,000. The company borrows and repays on the last day of the month.
The interest is accrued and paid every month.
a. Prepare a cash budget for January, February, March, and the quarter in total.
(13 marks)
b. Determine the budgeted ending balance of retained earnings as of March 31,
2022. Show all workings. (7 marks)

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