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) $470,000 $670,000 $230,000 $1,370,000 From past experience, the company has learned that 25% of a month’s sales are collected in the month of sale, another 65% are collected in the month following sale, and the remaining 10% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $400,000, and March sales totaled $430,000.

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

Solution :

(1) Schedule of Cash Collection

Particulars	April	May	June	Total for Quarter
Sales	$ 470,000	$ 670,000	$ 230,000	$ 1,370,000
Cash Collection in Same Month ( 25% of Sale)	$ 470,000 * 25% = $ 117,500	$ 670,000 * 25% = $ 167,500	$ 230,000 * 25% = $ 57,500	$ 342,500
Cash Collection in following Month (65% of Last Month Sale)	$ 430,000 * 65% = $ 279,500	$ 470,000 * 65% = $ 305,500	$ 670,000 * 65% = 435,500	$ 1,020,500
Cash Collection in Second following Month Sale (10% of Second Last Month Sale)	$ 400,000 * 10% = $ 40,000	$ 430,000 * 10% = $ 43,000	$ 470,000 * 10% = $ 47,000	$ 130,000
Total Cash Collection	$ 437,000	$ 516,000	$ 540,000	$ 1,493,000

(2) Account Receivable Balance as on June 30th :

Particulars	Accounts Receivable Balance
Feb	Nil as fully recovered in Feb, Mar and April
Mar	Nil as fully recovered in Mar, Apr and May
Apr	Nil as fully recovered in Apr, May and June
May	10% of 670,000 = 67,000
June	75% of 230,000 = 172,500
Total	$ 239,500