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) $500,000 $700,000 $240,000 $1,440,000 From past experience, the company has learned that 20% of a month’s sales are collected in the month of sale, another 60% are collected in the month following sale, and the remaining 20% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $430,000, and March sales totaled $460,000. Required: 1, Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter. 2. What is the accounts receivable balance on June 30th

Answer 1

Answer to Question 1:

Schedule of Expected Cash Collection from Sale by Month in 2nd Quarter:

Particulars	Feb($)	March($)	April($)	May($)	June($)	Total($)
Budgeted Sales	4,30,000	4,60,000	5,00,000	7,00,000	2,40,000	14,40,000
a)Cash Collection at 20% of Sales in Current month			1,00,000	1,40,000	48,000	2,88,000
			[5,00,000*20/100]	[7,00,000*20/100]	[2,40,000*20/100]
b) Cash Collection of 60% from immediately Previous month's Sale in Current month			2,76,000	3,00,000	4,20,000	9,96,000
			[4,60,000*60/100]	[5,00,000*60/100]	[7,00,000*60/100]
c) Cash Collection of 20% from 2nd Previous month's Sale in Current month			86,000	92,000	1,00,000	2,78,000
			[4,30,000*20/100]	[4,60,000*20/100]	[5,00,000*20/100]
Total			4,62,000	5,32,000	5,68,000	15,62,000

Note:

a) Cash Collection for the month of April will represent 20% Sales of Current month, 60% Sales of March & 20% of February.

b)Cash Collection for the month of May  will represent 20% Sales of Current month, 60% Sales of April & 20% of March.

c) Cash Collection for the month of June will represent 20% Sales of Current month, 60% Sales of May & 20% of April.

Answer to Question 2:

Account Receivable Balance as on 30th June:

Particulars	Feb	March	April	May	June
a)Cash Collection at 20% of Sales in Current month	Received	Received	Received	Received	Received
b)Cash Collection of 60% of Sale from immediately Previous month's Sale received in Current month	Received	Received	Received	Received	Received for May.(June- Pending)
c) Cash Collection of 20% from 2nd Previous month's Sale in Current month	Received	Received	Received	Received for March. (Pending-20% of May month sale will be received in July)	Received for April.(Pending-20% of June month sale will be received in August)

From the above table we conclude that Receivable upto June :-

20% Sales made in May- ($7,00,000*20/100) = $1,00,000

80% Sales made in June -( $2,40,000 * 80/100) = $1,92,000

Total Account Receivable Balance as on 30th June:

=$1,00,000 + $1,92,000 = $2,92,000