Schedule of Expected Cash Collections; Cash Budget [LO2, LO8]

Jodi Horton, president of the retailer Crestline Products, has just approached the company’s bank with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories in support of peak April sales. 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–June, during which the loan will be used:

a. On April 1, the start of the loan period, the cash balance will be $26,000. Accounts receivable on April 1 will total $151,500, of which $141,000 will be collected during April and $7,200 will be collected during May. The remainder will be uncollectible.

b. Past experience shows that 20% of a month’s sales are collected in the month of sale, 75%

in the month following sale, and 4% in the second month following sale. The other 1% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

April May June Sales (all on account) . . . . . . . . . $200,000 $300,000 $250,000 Merchandise purchases . . . . . . . $120,000 $180,000 $150,000 Payroll . . . . . . . . . . . . . . . . . . . . . $9,000 $9,000 $8,000 Lease payments . . . . . . . . . . . . . $15,000 $15,000 $15,000 Advertising . . . . . . . . . . . . . . . . . $70,000 $80,000 $60,000 Equipment purchases . . . . . . . . . $8,000 — —

Depreciation . . . . . . . . . . . . . . . . $10,000 $10,000 $10,000

c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on March 31, which will be paid during April, total $108,000.

d. In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200.

Required:

1. Prepare a schedule of 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.

3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain.