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)	$330,000	$530,000	$210,000	$1,070,000

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 $260,000, and March sales totaled $290,000.

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:

• In the given question, details of credit sales have been given and terms of the collection from that credit sales has been given.
• From the given details we have to find out “expected cash collection from sales” for second quarter i.e. April, may and June
• And “accounts receivable balance” on June 30^th
• Conditions for collections is that 25% is collected in same month, 60% in next month and 15% in next to next month
• Hence, for example if $100 sale is done in Jan, then $25 would be collected in Jan, $60 to be collected in Feb and $15 in March.
• By applying these details, cash collections from sales for April, May, June would be as follows

1. EXPECTED CASH COLLECTIONS FROM SALES FOR SECOND QUARTER:

Particulars	Total Collections
	February	March	April	May	June
Credit Sales	260000	290000	330000	530000	210000
25% of Same Month	65000	72500	82500	132500	52500
60% of Previous Month		156000	174000	198000	318000
15% of Two Month Back			39000	43500	49500
Total			295500	374000	420000
	Total Collections for second quarter= 1089500

2. ACCOUNTS RECEIVABLE BALANCE ON JUNE 30^TH:

• On June 30^th total two months’ sales of different percentage would be receivable as per terms of sales.
• Hence, 15% of May, which is $530000*15/100 = $79500
• And, 75% of June, which is $210000*75/100 = $157500
• Hence, total accounts receivable on June 30^th = $79500 + $157500 = $237000