Question

Providence City acquired its power plant from a private company on June 1. No receivables were acquired with the purchase. Therefore, total accounts receivable on June 1 had a zero balance. Providence plans to bill customers in the month following the month of sale, and 80% of the resulting billings will be collected during the billing month. 90% of the remaining balance should be collectable in the next following month. The remaining uncollectible amounts will relate to citizens who have moved away. Such amounts are never expected to be collected and will be written off. Electricity sales during June are estimated at $4,500,000, and expected to increase 25% in July August sales will be 5% less than July sales. a) For each dollar of sales, now much is expected to be collected? b) Estimate the monthly cash collections for June, July, August, and September. c) As of the end of August, how much will be the estimated amount of receivables for which future cash flows are anticipated? Worksheet 1 June August September

Answer 1

Solution: a) Expected collection per sales dollar 1*0.8+(1-0.8)*0.9 0.98 b) sales June July 4500000 5625000 114500000*1.25) Aug Sep 5343750 5625000*(1-0.05) cash collection For June billings 4500000*0.8 4500000*(1-0.8)*0.9 3600000 810000 For July billings 5625000*0.8 5625000*(1-0.8)*0.9 4500000 1012500 For Aug billings 5343750*0.8 Total cash collection 4275000 5287500 3600000 5310000 June 0 July Aug 1 012500 5236875 5625000*(1-0.8)*0.9 (5343750*0.98) Total Receivable 6249375