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roblem 7-25A Schedule of Expected Cash Collections; Cash Budget [LO7-2, LO7-8] Herbal Care Corp., a distributor...

roblem 7-25A Schedule of Expected Cash Collections; Cash Budget [LO7-2, LO7-8] Herbal Care Corp., a distributor of herb-based sunscreens, is ready to begin its third quarter, in which peak sales occur. The company has requested a $40,000, 90-day loan from its bank to help meet cash requirements during the quarter. Since Herbal Care has experienced difficulty in paying off its loans in the past, the loan officer at the bank has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled: a. On July 1, the beginning of the third quarter, the company will have a cash balance of $52,500. b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account): May (actual) $ 390,000 June (actual) $ 430,000 July (budgeted) $ 550,000 August (budgeted) $ 760,000 September (budgeted) $ 390,000 Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the month following sale, and 3% in the second month following sale. The remainder is uncollectible. c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below: July August September Merchandise purchases $ 330,000 $ 456,000 $ 234,000 Salaries and wages $ 43,500 $ 62,000 $ 63,000 Advertising $ 220,000 $ 143,000 $ 103,000 Rent payments $ 9,400 $ 9,400 $ 9,400 Depreciation $ 10,500 $ 10,500 $ 10,500 Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $258,000. d. Equipment costing $10,000 will be purchased for cash during July. e. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September. Interest on the loan will total $1,200. Required: 1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total. 2. Prepare a cash budget, by month and in total, for the third quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.)

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Expert Solution

Ans- Cash Budget

Description July August September Quarter
Cash balance,beginning $52,500 $1,800 $45,300 $52,500
Collections from customers 450,200 587,900 646,000 1,684,100
Total cash available 502,700 589,700 691,300 1,736,600
Less: disbursements
Merchandise purchases 258,000 330,000 456,000 1,044,000
Salaries and wages 43,500 62,000 63,000 168,500
Advertising 220,000 143,000 103,000 466,000
Rent payments 9,400 9,400 9,400 28,200
Equipment purchase 10,000 - - 10,000
Total disbursements 540,900 544,400 631,400 1,716,700
Excess of receipts over disbursements ($38,200) $45,300 $59,900 $19,900
Financing:
Borrowings $40,000 - - $40,000
Repayments - - ($40,000) ($40,000)
Interest - - ($1,200) ($1,200)
Total financing $40,000 - ($41,200) ($1,200)
Cash balance, ending $1,800 $45,300 $18,700 $18,700


1- The calculation of collection from customers:-

May June July August September
Sales $390,000 $430,000 $550,000 $760,000 $390,000
25% of a month sale in the month sale

97,500

(390,000*25/100)

107,500 137,500 190,000 97,500
70% in the month following sale

273,000

(390,000*70/100)

301,000 385,000 532,000
3% in the second month following sale

11,700

(390,000*3/100)

12,900 16,500
Total collections $450,200 $587,900 $646,000

Note-The depreciation is a non-cash expense and non-cash expenses are not considered while preparing cash budget.

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