The president of the retailer Prime Products has just approachedthe company’s bank with a...

Free

80.2K

Verified Solution

Question

Accounting

The president of the retailer Prime Products has just approachedthe company’s bank with a request for a $89,000, 90-day loan. Thepurpose of the loan is to assist the company in acquiringinventories. Because the company has had some difficulty in payingoff its loans in the past, the loan officer has asked for a cashbudget to help determine whether the loan should be made. Thefollowing data are available for the months April through June,during which the loan will be used:
A. On April 1, the start of the loan period, the cash balancewill be $33,400. Accounts receivable on April 1 will total$173,600, of which $148,800 will be collected during April and$19,840 will be collected during May. The remainder will beuncollectible.
B. Past experience shows that 30% of a month’s sales arecollected in the month of sale, 60% in the month following sale,and 8% in the second month following sale. The other 2% is baddebts that are never collected. Budgeted sales and expenses for thethree-month period follow: April May June Sales (all on account) $302,000 $ 518,000 $ 277,000 Merchandise purchases $ 206,000 $134,500 $ 149,000 Payroll $ 29,800 $ 29,800 $ 24,500 Lease payments$ 28,200 $ 28,200 $ 28,200 Advertising $ 73,600 $ 73,600 $ 43,680Equipment purchases $ ? ? 98,000 Depreciation $ 20,800 $ 20,800 $20,800
C. Merchandise purchases are paid in full during the monthfollowing purchase. Accounts payable for merchandise purchasesduring March, which will be paid in April, total $160,500.
D. In preparing the cash budget, assume that the $89,000 loanwill be made in April and repaid in June. Interest on the loan willtotal $1,240.
Required: 1. Calculate the expected cash collections for April,May, and June, and for the three months in total.
2. Prepare a cash budget, by month and in total, for thethree-month period.

Answer & Explanation Solved by verified expert

3.7 Ratings (427 Votes)

1) Expected Cash Collections
	April	May	June	Total
Cash collections from credit sales:
From Accounts Receivable	$148,800	$19,840		$168,640
From April sales ($302,00030/100); ($302,00060/100); ($302,000*8/100)	$90,600	$181,200	$24,160	$295,960
From May sales ($518,00030/100); ($518,00060/100)		$155,400	$310,800	$466,200
From June sales ($277,000*30/100)			$83,100	$83,100
Total cash collections from credit sales	$239,400	$356,440	$418,060	$1,013,900

2) Cash Budget
	April	May	June	Total
Beginning cash balance	$33,400	$69,700	$88,540	$191,640
Add: Cash collections from credit sales	$239,400	$356,440	$418,060	$1,013,900
Total cash available	$272,800	$426,140	$506,600	$1,205,540
Less: Cash disbursements:
Cash payments for merchandise purchases	($160,500)	($206,000)	($134,500)	($501,000)
Payroll	($29,800)	($29,800)	($24,500)	($84,100)
Lease payments	($28,200)	($28,200)	($28,200)	($84,600)
Advertising	($73,600)	($73,600)	($43,680)	($190,880)
Equipment purchases			($98,000)	($98,000)
Preliminary cash balance	($19,300)	$88,540	$177,720	$246,960
Financing:
Borrowings	$89,000	$0	$0	$89,000
Repayments	$0	$0	($89,000)	($89,000)
Interest on Loan	$0	$0	($1,240)	($1,240)
Ending cash balance	$69,700	$88,540	$87,480	$245,720

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

In: AccountingThe president of the retailer Prime Products has just approachedthe company’s bank with a request...The president of the retailer Prime Products has just approachedthe company’s bank with a request for a $89,000, 90-day loan. Thepurpose of the loan is to assist the company in acquiringinventories. Because the company has had some difficulty in payingoff its loans in the past, the loan officer has asked for a cashbudget to help determine whether the loan should be made. Thefollowing data are available for the months April through June,during which the loan will be used:A. On April 1, the start of the loan period, the cash balancewill be $33,400. Accounts receivable on April 1 will total$173,600, of which $148,800 will be collected during April and$19,840 will be collected during May. The remainder will beuncollectible.B. Past experience shows that 30% of a month’s sales arecollected in the month of sale, 60% in the month following sale,and 8% in the second month following sale. The other 2% is baddebts that are never collected. Budgeted sales and expenses for thethree-month period follow: April May June Sales (all on account) $302,000 $ 518,000 $ 277,000 Merchandise purchases $ 206,000 $134,500 $ 149,000 Payroll $ 29,800 $ 29,800 $ 24,500 Lease payments$ 28,200 $ 28,200 $ 28,200 Advertising $ 73,600 $ 73,600 $ 43,680Equipment purchases $ ? ? 98,000 Depreciation $ 20,800 $ 20,800 $20,800C. Merchandise purchases are paid in full during the monthfollowing purchase. Accounts payable for merchandise purchasesduring March, which will be paid in April, total $160,500.D. In preparing the cash budget, assume that the $89,000 loanwill be made in April and repaid in June. Interest on the loan willtotal $1,240.Required: 1. Calculate the expected cash collections for April,May, and June, and for the three months in total.2. Prepare a cash budget, by month and in total, for thethree-month period.