Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets were $16,000 in cash and $3,500 in merchandise inventory. For purposes of budget preparation, assume that the company's cost of goods sold is 60% of sales. Expected sales for the first four months appear below. The company desires that the merchandise inventory on hand at the end of each month be equal to 50% of the next month's merchandise sales (stated at cost). All purchases of merchandise inventory must be paid in the month of purchase. Sixty percent of all sales should be for cash; the balance will be on credit. Seventy-five percent of the credit sales should be collected in the month following the month of sale, with the balance collected in the following month. Variable selling and administrative expenses should be 10% of sales and fixed expenses (all depreciation) should be $3,000 per month. Cash payments for the variable selling and administrative expenses are made during the month the expenses are incurred.
-The Accounts Receivable balance that would appear in the March 31 budgeted balance sheet would be:

Question

Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets were $16,000 in cash and $3,500 in merchandise inventory. For purposes of budget preparation, assume that the company's cost of goods sold is 60% of sales. Expected sales for the first four months appear below.  The company desires that the merchandise inventory on hand at the end of each month be equal to 50% of the next month's merchandise sales (stated at cost). All purchases of merchandise inventory must be paid in the month of purchase. Sixty percent of all sales should be for cash; the balance will be on credit. Seventy-five percent of the credit sales should be collected in the month following the month of sale, with the balance collected in the following month. Variable selling and administrative expenses should be 10% of sales and fixed expenses (all depreciation) should be $3,000 per month. Cash payments for the variable selling and administrative expenses are made during the month the expenses are incurred.
-The Accounts Receivable balance that would appear in the March 31 budgeted balance sheet would be:

Quizplus · Accepted Answer

To calculate the accounts receivable balance in March, we need to first calculate the credit sales for January, February, and March. Using the sales figures provided and the given percentage of sales on credit, we get:

January credit sales = $40,000 x 40% = $16,000
February credit sales = $42,000 x 40% = $16,800
March credit sales = $38,000 x 40% = $15,200

To calculate the collections in March, we need to know the collections for January and February. 75% of credit sales are collected in the following month, so:

January collections = $16,000 x 75% = $12,000
February collections = $16,800 x 75% = $12,600

Therefore, the accounts receivable balance at the end of March would be:

March credit sales (at 60% cost) = $15,200 x 60% = $9,120
Total collections for January and February = $12,000 + $12,600 = $24,600
Accounts receivable balance = $9,120 - $24,600 = -$15,480

Since the balance is negative, it means that the company expects to collect more from credit sales in January and February than it expects to extend in credit sales for March. Therefore, the answer is C) $8,800, which is the difference between the March credit sales and the total collections for January and February.

Justin's Plant Store, a Retailer, Started Operations on January 1