The LaGrange Corporation had the following budgeted sales for the first half of the current year: Cash Sales Credit Sales January $ 40,000 $ 140,000 February $ 45,000 $ 160,000 March $ 35,000 $ 120,000 April $ 30,000 $ 115,000 May $ 40,000 $ 190,000 June $ 70,000 $ 90,000 The company is in the process of preparing a cash budget and must determine the expected cash collections by month. To this end, the following information has been assembled: Collections on sales: 40% in month of sale 45% in month following sale 15% in second month following sale The accounts receivable balance on January 1 of the current year was $66,000, of which $51,000 represents uncollected December sales and $15,000 represents uncollected November sales. The total cash collected during January by LaGrange Corporation would be:a.$224,000 b.$194,000 c.$85,000 d.$149,250

The correct answer is:

$149,250 (d.)

Explanation:

First let us lay out the relevant information:

January sales:

cash sales = $40,000

credit sales = $140,000

collection on sales in the month of sale = 40%

in the month following sales = 45%

in the second month following sales = 15%

Note that these percentages are applied on credit sales alone, since cash sales have been paid already

Account receivable on January 1 = $66,000

November sales = $15,000

December sales = $51,000

Next, using the information, let us calculate the total receivable cash in January as follows:

From November sales

The amount $15,000 is the 15% remaining on total collectible sales from November sales, hence the whole of the $15,000 from November will be collected in January.

From December sales:

The amount $51,000 collectible from December sales comprises of the 45% collected in the month following sale (January), and the 15% to be collected in the second month following sale (February). As a result, the ratio of the amount from December sales to be collected in January and February is 45% : 15% respectively. Hence the $51,000 will be shared into a ratio of 45:15, with the 45% ratio collected in January. This is done as follows:

Ratio of amounts = 45:15 = 3:1 (January:February)

January amount = 3/4 of total amount; while February amount = 1/4 of total amount

Total amount = $51,000

Therefore amount collected in January from December sales:

= 3/4 × 51,000 = $38,250

From January Sales:

Cash sales = $40,000 (Note that cash sales has already been collected in cash)

Credit sales = $140,000 (40% of this, is collected in the month of sale)

Therefore, amount collected in January from the credit sales in January:

= 40% of $140,000 = 0.4 × 140,000 = $56,000

Therefore total amount collected in January from cash and credit sales

= 40,000 + 56,000 = $96,000

Finally, to get the total cash collected in January, we will add all the collectible amounts from sales in November to January

From November             = $ 15,000

From December             = $ 38,250

From January                 = $ 96,000

Total collectible cash   = $ 149,250