Question

Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales occur in May of each year, as shown in the company’s sales budget for the second quarter given below:

	April	May	June	Total
Budgeted sales (all on account)	$450,000	$650,000	$250,000	$1,350,000

From past experience, the company has learned that 25% of a month’s sales are collected in the month of sale, another 60% are collected in the month following sale, and the remaining 15% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $380,000, and March sales totaled $410,000.

Required:

1. Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.

2. Assume that the company will prepare a budgeted balance sheet as of June 30. Compute the accounts receivable as of that date.

Answer 1

1.

Silver Company

Schedule of expected cash collections

	April	May	June	Total
February sales	$57,000 ($380,000*15%)			$57,000
March sales	$246,000 ($410,000*60%)	$61,500 ($410,000*15%)		$307,500
April sales	$112,500 ($450,000*25%)	$270,000 ($450,000*60%)	$67,500 ($450,000*15%)	$450,000
May sales		$162,500 ($650,000*25%)	$390,000 ($650,000*60%)	$552,500
June sales			$62,500 ($250,000*25%)	$62,500
	$415,500	$494,000	$520,000	$1,429,500

2.

Collection pattern = 25% in the month of sale, 60% in the month following the sale and 15% in the second month following the sale.

Of May sales 25% are collected in May, 60% are collected in June and 15% will be collected in July which are Accounts receivable at the end of June.

Of June sales, 25% are collected in June and the remaining 75% (60%+15%) will be collected in July and August which are Accounts receivable at the end of June.

Silver Company

Accounts receivable at June 30

May sales	$97,500 ($650,000*15%)
June sales	$187,500 ($250,000*75%)
Total accounts receivable at June 30	$285,000