The president of the retailer Prime Products has just approachedthe company’s bank with a request for a $93,000, 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:
On April 1, the start of the loan period, the cash balance willbe $36,000. Accounts receivable on April 1 will total $179,200, ofwhich $153,600 will be collected during April and $20,480 will becollected during May. The remainder will be uncollectible.
Past experience shows that 30% of a month’s sales are collectedin the month of sale, 60% in the month following sale, and 8% inthe second month following sale. The other 2% is bad debts that arenever collected. Budgeted sales and expenses for the three-monthperiod follow:
| April | May | June |
| Sales (all on account) | $ | 232,000 | $ | 476,000 | $ | 296,000 |
| Merchandise purchases | $ | 188,000 | $ | 163,500 | $ | 135,500 |
| Payroll | $ | 22,800 | $ | 22,800 | $ | 26,900 |
| Lease payments | $ | 31,400 | $ | 31,400 | $ | 31,400 |
| Advertising | $ | 63,600 | $ | 63,600 | $ | 41,680 |
| Equipment purchases | | ? | | ? | $ | 102,000 |
| Depreciation | $ | 17,800 | $ | 17,800 | $ | 17,800 |
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Merchandise purchases are paid in full during the monthfollowing purchase. Accounts payable for merchandise purchasesduring March, which will be paid in April, total $162,500.
In preparing the cash budget, assume that the $93,000 loan willbe made in April and repaid in June. Interest on the loan willtotal $1,280.
Required:
1. Calculate the expected cash collections for April, May, andJune, and for the three months in total.
2. Prepare a cash budget, by month and in total, for thethree-month period. (Cash deficiency, repayments and interestshould be indicated by a minus sign.)
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| | Prime Products | | Cash Budget | | April | May | June | Quarter | | Beginning cash balance | | | | | | Add receipts: | | | | | | Collections from customers | | | | | | Total cash available | | | | | | Less cash disbursements: | | | | | | Merchandise purchases | | | | | | Payroll | | | | | | Lease payments | | | | | | Advertising | | | | | | Equipment purchases | | | | | | Total cash disbursements | | | | | | Excess (deficiency) of cash availableover disbursements | | | | | | Financing: | | | | | | Borrowings | | | | | | Repayments | | | | | | Interest | | | | | | Total financing | | | | | | Ending cash balance | |
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