Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The president of the retailer Prime Products has just approached the company's bank with a request for a $73,000, 90-day loan. The purpose of the

The president of the retailer Prime Products has just approached the company's bank with a request for a $73,000, 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:

On April 1, the start of the loan period, the cash balance will be $41,800. Accounts receivable on April 1 will total $182,000, of which $156,000 will be collected during April and $20,800 will be collected during May. The remainder will be uncollectible.

Past experience shows that 30% of a months 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:

April May June
Sales (all on account) $ 316,000 $ 575,000 $ 264,000
Merchandise purchases $ 214,000 $ 193,000 $ 151,500
Payroll $ 34,200 $ 34,200 $ 27,300
Lease payments $ 31,600 $ 31,600 $ 31,600
Advertising $ 74,000 $ 74,000 $ 43,000
Equipment purchases $ 0 $ 0 $ 70,500
Depreciation $ 31,000 $ 31,000 $ 31,000

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 $175,000.

In preparing the cash budget, assume that the $73,000 loan will be made in April and repaid in June. Interest on the loan will total $1,080.

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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

IS Audit And Control For Accountants

Authors: Mr Amir Manzoor

1st Edition

1493665006, 978-1493665006

More Books

Students also viewed these Accounting questions

Question

How to reverse a Armstrong number by using double linked list ?

Answered: 1 week ago