Question

Logan Township acquired its water system from a private company on June 1. No receivables were acquired with the purchase. Therefore, total accounts receivable on June 1 had a zero balance. Logan plans to bill customers in the month following the month of sale, and 70% of the resulting billings will be collected during the billing month. In the next following month, 90% of the remaining balance should be collectable. The remaining uncollectible amounts will relate to citizens who have moved away. Such amounts are never expected to be collected and will be written off.

Water sales during June are estimated at $4,000,000, and expected to increase 30% in July. August sales will be the same as July sales.

Required:
Estimate the monthly cash collections for June, July, August, and September.

Answer 1

Logan Township

Estimate of the monthly cash collections for June, July, August, and September:

June July August September

Sales of water $4,000,000 $5,200,000 $5,200,000

Cash Collections:

70% month of sale 2,800,000 3,640,000 3,640,000

27% following month 1,080,000 1,404,000 $1,404,000

Monthly cash

collections $2,800,000 $4,720,000 $5,044,000 $1,404,000

Step-by-step explanation:

a) Data and Calculations:

Collections:

70% month of sale

90% of 30% following month of sale = 27%

10% of 30% Uncollectible = 3%

Water sales in June = $4,000,000

Water sales in July = $5,200,000 ($4,000,000 * 1.3)

Water sales in August = $5,200,000

June July August September

Sales of water $4,000,000 $5,200,000 $5,200,000

Cash Collections:

70% month of sale 2,800,000 3,640,000 3,640,000

27% following month 1,080,000 1,404,000 $1,404,000

Monthly cash

collections $2,800,000 $4,720,000 $5,044,000 $1,404,000