Question

The president of the retailer Prime Products has just approached the company's bank with a request for a $85,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following 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 balance will be $13,600. Accounts receivable on April 1 will total $168,000, of which $144,000 will be collected during April and $19,200 will be collected during May. The remainder will be uncollectible. b. Past experience shows that 30% of a month's sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses for the three- month period follow: Sales (all on account) Merchandise purchases Payroll Lease payments Advertising Equipment purchases Depreciation April May June $ 240,000 $ 620,000 $289,000 $ 192,000 $ 196,500 $ 179,500 $ 16,200 $ 16,200 $ 24,700 $ 38,200 $ 38,200 $ 38,200 $ 72,600 $ 72,600 $ 72,880 $ 66,500 $ 33,800 $ 33,800 $ 33,800 c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid in April, total $156,000. d. In preparing the cash budget, assume that the $85,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200. 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 the three-month period. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Calculate the expected cash collections for April, May, and June, and for the three months in total. April May June Quarter Total cash collections i

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Answer 1

1. Statement showing Expected Cash collection collection May June 2 Particulars Total (6) Bad Debts April on 168,000 144,000 19,200 4800 • Accounts Recadrable April 1 Sales of April sales of may sales of June op 240 000 629,000 289.000 73,000 194.000 19.200 4800 186,000 372.000 12400 86,700 5780 $216,000 $349,200 $477900 Total collection Expected Cast collection April May June Quarter $216,000 $349200 $ 477,900 $1043 100 Total Cash Collection

Prome Products Cost Budget April May June Quarto Beginneng cash balance $13.600 ($160,800) ($135,560) ($ 283700 Add recipts: collection from customer 216,000 349,200 477,900 1,043, 100 Total Cooh available $229,600 $ 188,900 $342,400 $830,400 Less cash desbursements: Marchandise purchases $192.000 $ 196,500 $ 179,500 $568.000 Payroll 16,200 16,200 24,700 57,100 Lease payments 38.200 38200 38200 114,600 Advertising 72,600 2,600 72.880 218,080 Eoruipment purchases 66,500 66500 Accounts payable of 156000 March paid in April 156. CSO Total cost des bure sements $415.000 $ 323.500 $ 381,780 $1180,260 Financing Borrowings $85.000 $85.000 Repayments (5 85.000) ($ 85,000) Interest (400) (400) 4000 $1200) Total financing $84.600 ($400 ($85,400 ($200) Ending Corsk balance ($169800) ($135,500) ($ 124,780) 6421080)

Note: As no information is given regarding the payment of interest on loan. It is assumed that interest on loan for each month paid at the end of that month.

Interest per month = $1200/3 = $400.