Solved: Gold Sporting Equipment GSE is in the process of

preparing

Gold Sporting Equipment (GSE) is in the process of preparing its budget for the third quarter of
2010. The budgeting staff has gathered the following data:
1. Account balances as of June 30:
Cash ................... $ 25,000
Accounts receivable ............. 15,000
Short-term payable (equipment purch.) ..... 0
Merchandise inventory ............ 47,520
Building and equipment (net) ......... 200,000
Bank loans pay ................ 0
Income tax payable ............... 0
2. Recent and forecasted sales:
June (actual) ............... $ 75,000
July ................... 80,000
August ................. 82,000
September ................. 90,000
October ................. 100,000
3. Sales are 80 percent cash and 20 percent on credit. Credit accounts are all collected 30 days
after sale.
4. At gross purchase prices of inventories, GSE's gross margin averages 40 percent of
revenues. GSE records all inventory purchases net of available purchase discounts.
5. Operating expenses: Salaries and wages, $8,000 per month plus 5 percent of revenue; rent
and property tax, $1,000 per month; other operating expenses, excluding depreciation, 2
percent of revenues; depreciation $800 per month. All cash operating expenses in a month are
paid before the end of the month.
6. GSE has no minimum inventory requirement. The policy is to purchase each month on the
15th the expected sales (@ cost) for the following month. Terms of purchases are 1/10, n/30.
Purchases usually arrive on or before the 20th. GSE's policy is to take all cash discounts
offered.
7. GSE is negotiating the purchase of new equipment for $127,000 to be installed in September.
Terms are 50 percent in the month before and 50 percent after the month of installation.
8. Minimum cash balance is $30,000. All borrowings are effective at the beginning of the month
and all repayments are made at the end of the month of repayment. Loans are repaid when
sufficient cash is available. The interest rate is 15 percent per year, payable at the end of each
month. Both borrowings and repayments are in multiples of $10,000. Management does not
want to borrow any more cash than is necessary and wants to repay whenever the cash on
hand exceeds the minimum requirement.
9. GSE plans to pay no dividend to stockholders.
Required
1. Complete schedules A through E.

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 2. Prepare a budgeted income statement for the third quarter and beginning and end-of-quarter
balance sheets. GSE estimates its income tax rate at 25 percent, payable in the second quarter
of the following year.
3. Gold Sporting Equipment has been using the loan described in Item 8 to meet its needs for
funds. Alternatively, Gold can issue long-term bonds at no more than 12 percent annual interest
rate to increase funds available for operations. What is the most sensible type of loan GSE
should use to meet its needs? Explain your reasoning.
4. The underlying business situation has been greatly simplified. List at least three complicating
factors that may exist in a real businesssetting.

ANSWER
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