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)	$340,000	$540,000	$170,000	$1,050,000

From past experience, the company has learned that 20% of a month’s sales are collected in the month of sale, another 75% are collected in the month following sale, and the remaining 5% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $270,000, and March sales totaled $300,000.

Required:
1.	Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.

     

2.	Assume that the company will prepare a budgeted balance sheet as of June 30. Compute the accounts receivable as of that date.

     

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Answer 1

Solution:
1.	Schedule of expected cash collections from sales, for the second quarter.
		April	May	June	Total
	February sales	13,500	0	0	13,500
	March sales	225,000	15,000	0	240,000
	April sales	68,000	255,000	17,000	340,000
	May sales	0	108,000	405,000	513,000
	June sales	0	0	34,000	34,000
	Total cash collections	306,500	378000	456000	1,140,500
Working Notes:
Notes:	Cash are collected 20% of a month’s sales are collected in the month of sale, another 75% are collected in the month following sale, and the remaining 5% are collected in the second month following sale.
	Means
	February sales of $270,000 will be received in February 20% that is $54,000, following month means in March 75% that is $202,500 and in April the second month following sale 5% that is 13,500
	Schedule of expected cash collections from sales, for the second quarter.
		April	May	June	Total
	February sales	=5%x$270,000 =$13,500	0	0	$13,500
	March sales	=75%x$300,000 =$225,000	=5%x$300,000 =$15,000	0	240,000
	April sales	=20%x$340,000 =$68,000	=75%x$340,000 =$255,000	=5%x$340,000 =$17,000	340,000
	May sales	0	=20%x$540,000 =$108,000	=75%x$540,000 =$405,000	513,000
	June sales	0	0	=20%x$170,000 =$34,000	34,000
	Total cash collections	$306,500	$378,000	$456,000	$1,140,500
2.	The accounts receivable as of June 30 = $163,000
Working Notes:
	The accounts receivable as of June 30 is the balance still outstanding to be received from our debtor the credit sales.
Now	Again by observing the above Schedule of expected cash collections from sales, for the second quarter we can find that till June 30 all the sales have been received except 5% of May sales & 80% sales of June, Hence our Accounts receivable as on June 30 will be sum of these
	The accounts receivable as of June 30 = 5% of May sales + 80% of June sales
		=(5% x 540,000) + (80% x $170,000)
		=$27,000+$136,000
		=$163,000
Please feel free to ask if anything about above solution in comment section of the question.