Assignment

Schedule of Expected Cash Collections; Cash Budget [LO8–2, LO8–8] The president of the retailer Prime 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 invento-ries. Because the company has had some difficulty in paying off its loans in the past, the loan offi-cer 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 $24,000. Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 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% rep-resents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow: April May June Sales (all on account) . . . . . . . . . . . . . $300,000 $400,000 $250,000 Merchandise purchases . . . . . . . . . . . $210,000 $160,000 $130,000 Payroll . . . . . . . . . . . . . . . . . . . . . . . . . $20,000 $20,000 $18,000 Lease payments . . . . . . . . . . . . . . . . . $22,000 $22,000 $22,000 Advertising . . . . . . . . . . . . . . . . . . . . . . $60,000 $60,000 $50,000 Equipment purchases . . . . . . . . . . . . . — — $65,000 Depreciation . . . . . . . . . . . . . . . . . . . . $15,000 $15,000 $15,000 c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid during April, total $140,000. 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.

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