Question Volga Pianos (60 Marks)

Dolly Dear is the owner of a shop (Volga Pianos) selling pianos. The pianos come in

a variety of colours (ebony, mahogany and white) but they are basically the same

instrument and cost the same. Volga Pianos has been operating for some time and

the balance sheet as at 31 March 2007 is as follows.

Volga Pianos

Balance Sheet

As at 31 March 2007

                   $ $

Owners Equity                                       44,570

Represented by:

Assets

Current Assets

Cash at Bank                                 15,000

Accounts receivable                           45,360

Inventories                                   12,000

72,360

Non-Current asset

Furniture

Cost                                           2,800

Less Accumulated depreciation                    840

Net Book Value                                        1,960

Total Assets                                          74,320

Less Liabilities

Current Liabilities

Accounts Payable *                             750

Current portion of term loan                      7,000

7,750

Non Current Liabilities

Term Loan                                            22,000

Total Liabilities                                        29,750

Net Assets                                            44,570

*Accounts Payable: Advertising $400 and Telephone & Utilities $350.

Dolly requires your help in preparing a budget for the quarter 1 April to 30 June 2007

and provides you with the following information relating to 2007.

Sales and selling expenses

The estimated sales of pianos month by month are April 20, May 16, June 24 and

July 20. Actual sales for February was 16 pianos and March 20 pianos. (These

quantities are shown on the template).

Selling price is $3,600 per piano.

Volga pianos pays Dons Delivery $100 per piano to deliver pianos. This is paid in the

month delivery is made.

All sales are on credit. Cash collected from sales is usually 40% in the month of sale,

40% in the month following the sale, and 20% two months after the sale.

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The sales person is paid 5% Commission on each piano sold. Commission is paid

the month after sale.

Each month Volga Pianos incurs approximately $200 on Advertising. It is expected

that an additional $1,000 will be incurred in June on a special advertising campaign.

Advertising is paid for in the following month. Actual advertising incurred in March

was $400.

Inventory

In March 2007, 22 pianos were purchased and there were 5 pianos on hand at 31

March 2007. In terms of Volga’s inventory policy the number of pianos on hand at the

beginning of each month should be equal to 25% of the month’s forecast sales. Each

piano cost $2,400 and is paid for in the month following purchase. There is no

expected change in the cost of pianos for the budgeted period. Volga operates the

periodic inventory system.

Non-Current Asset

At the end of the year the only non-current asset was furniture which is depreciated

at a rate of 15% using the straight line method of depreciation. At the beginning of

April Dolly plans to acquire a new computer for the business for $9,900 paid in cash.

This will be depreciated at the rate of 33.33%. The computer will be used for word

processing, spreadsheets and basic accounting.

Current Liabilities

Accounts Payable are due on the 20th of the month following purchase. There is no

bank overdraft arranged at present.

Non-Current Liability

The term loan was taken out a few years ago with a personal guarantee from Dolly.

$7,000 is due for repayment on 1 April 2007. The interest rate is 12% per annum,

calculated on the balance at the end of the financial year and payable in equal

monthly instalments on the last day of each month.

Premises and related expenses

The shop is rented at an annual rental of $24,000, payable in equal monthly

instalments. Telephone and utilities work out approximately $300 a month payable

the month following. Supplies work out at $100 a month and are paid for in the month

of purchase. Actual telephone and utilities expenses in March were $350.

Staff

There is one sales person and an office clerk. The sales person is earns $20,000 per

year plus commission (as described in Sales and selling expenses above) while the

clerk earns $25,000 per year. Assume salaries amounts are paid to staff in the month

they work.

Travel

Dolly plans a trip to Austria in June which will cost $10,000 and Volga Pianos will pay

the full amount in cash in May. Dolly thinks approximately half of the trip will be

business (sourcing pianos) and half pleasure (hiking holiday).

Owners Equity

Dolly draws $6,500 a month from the business.