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)	$390,000	$590,000	$230,000	$1,210,000

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 $320,000, and March sales totaled $350,000.

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

Information provided in the question
Amount in $	February	March	April	May	June
Budgeted sales (all on account)	320,000	350,000	390,000	590,000	230,000
Collection history provided in the question
Month 1		25%
Month 2		60%
Month 3		15%
Bad debts are negligible and can be ignored

Solution:

1	Schedule of expected cash collections from sales, by month and in total, for the second quarter.
	Month	Sales	February	March	April	May	June	July	August
	February	320,000	80,000	192,000	48,000
			15% of sales	60% of sales	15% of sales
	March	350,000		87,500	210,000	52,500
				15% of sales	60% of sales	15% of sales
	April	390,000			97,500	234,000	58,500
					15% of sales	60% of sales	15% of sales
	May	590,000				147,500	354,000	88,500
						15% of sales	60% of sales	15% of sales
	June	230,000					57,500	138,000	34,500
							15% of sales	60% of sales	15% of sales
	Monthly collection		80,000	279,500	355,500	434,000	470,000	226,500	34,500
	Total collection in the second quarter	$                      1,259,500

2	Accounts receivable balance on June 30th
	Method 1
	Sum of the collection of subsequent months
	Collections in July	226,500
	Collections in August	34,500
	AR as at June 30	$ 261,000
	Method 2
	Using the following equation
	Opening Receivables + Sales - Collection = Closing receivables
	Amount in $	April	May	June
	Opening receivables	310,500	345,000	501,000
	Sales for the month	390,000	590,000	230,000
	Less: collection	(355,500)	(434,000)	(470,000)
	Closing receivables	$ 345,000	$ 501,000	$ 261,000

	Working note
	Computation of opening accounts receivable for April
	Uncollected amount of February	15% of sales	48,000
	Uncollected amount of March	75% of sales i.e. (60% + 15%)	262,500
	Opening balance for April	310,500