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

1.

Silver Company

Schedule of expected cash collections

	April	May	June	Total
February sales	$39,000 ($260,000*15%)			$39,000
March sales	$174,000 ($290,000*60%)	$43,500 ($290,000*15%)		$217,500
April sales	$82,500 ($330,000*25%)	$198,000 ($330,000*60%)	$49,500 ($330,000*15%)	$330,000
May sales		$132,500 ($530,000*25%)	$318,000 ($530,000*60%)	$450,500
June sales			$52,500 ($210,000*25%)	$52,500
	$295,500	$374,000	$420,000	$1,089,500

2.

Collection pattern = 25% in the month of sale, 60% in the month following the sale and 15% in the second month following the sale.

Of May sales 25% are collected in May, 60% are collected in June and 15% will be collected in July which are Accounts receivable at the end of June.

Of June sales, 25% are collected in June and the remaining 75% (60%+15%) will be collected in July and August which are Accounts receivable at the end of June.

Silver Company

Accounts receivable at June 30

May sales	$79,500 ($530,000*15%)
June sales	$157,500 ($210,000*75%)
Total accounts receivable at June 30	$237,000