Question

*25) The following information pertains to Amigo Corporation:*

Month Sales Purchases
July $30,000 $10,000
August 34,000 12,000
September 38,000 14,000
October 42,000 16,000
November 48,000 18,000
December 60,000 20,000

∙ Cash is collected from customers in the following manner: Month of sale (2% cash discount) 30%
Month following sale 50%
Two months following sale 15%
Amount uncollectible 5%
∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month.

Required:
a. Prepare a summary of cash collections for the 4th quarter.
b. Prepare a summary of cash disbursements for the 4th quarter.

Objective 6.A

Answer 1

To calculate cash collections and disbursements for Amigo Corporation's 4th quarter, apply the company's policies to the sales and purchases data. Collections are based on the month of sale and following two months with specific percentages, while disbursements involve paying 40% of purchases in the purchase month and the balance the following month.

Step-by-step explanation:

Summaries of Cash Collections and Disbursements

To prepare a summary of cash collections for the 4th quarter (October, November, December), we need to apply the given information about the company's collection policies to the sales data provided. Importantly, cash is collected in the following manner:

• 30% in the month of sale (including 2% cash discount)
• 50% in the month following the sale
• 15% two months following the sale
• 5% uncollectible

For October sales of $42,000, the collections would be:

• 30% in October equals $12,600 (including 2% discount on $12,600, or $252).
• 50% in November equals $21,000
• 15% in December equals $6,300

You would perform similar calculations for November and December sales.

As for the cash disbursements, 40% of purchases are paid in the month of purchase, with the balance paid the following month. For October purchases of $16,000, the disbursements would be:

• 40% in October equals $6,400
• 60% in November equals $9,600 (carrying over from October's balance)

Follow this pattern to calculate November and December disbursements.