Chapter 21 – Weygandt Financial and Managerial Accounting, 3e
Challenge Exercises
CE 21-1
Martin Company expects to have a cash balance of $135,000 on January 1, 2020. Relevant
monthly budget data for the first 2 months of 2020 are as follows:
Collections from customers: January $246,500, February $435,000.
Payments for direct materials: January $155,000, February $240,000
Direct labor: January $90,000, February $135,000. Wages are paid in the month they
are incurred.
Manufacturing overhead: January $63,000, February $75,000. These costs include
depreciation of $5,000 per month. All other overhead costs are paid as incurred.
Selling and administrative expenses: January $45,000, February $60,000. These costs
are exclusive of depreciation. They are paid as incurred.
Sales of marketable securities in January are expected to realize $36,000 in cash.
Martin Company has a line of credit at the local bank that enables it to borrow up to
$75,000. The company wants to maintain a minimum monthly cash balance of $60,000.
Instructions
(a) Prepare a cash budget for January and February.
(b) Martin Company’s chief financial officer feels that it is important to have data for the
entire quarter especially since their financial forecasts indicate some difficult economic
periods in the coming year. March information has been budgeted as follows:
Collections from customers: $375,000
Payments for direct materials: $206,000
Direct labor: Wages paid in March $116,000
Manufacturing overhead: $64,500. This includes the monthly depreciation of
$5,000.
Selling and administrative expenses: $51,600. This cost is exclusive of
depreciation.
Marketable securities of $50,000 can be sold if needed for additional cash.
(1) Prepare a cash budget for March assuming that the company does not sell the
marketable securities.
(2) What is the maximum amount the company can borrow during March? Does this
provide the company with an adequate ending cash balance?
(3) How much does the company need to borrow if the marketable securities are sold?
(4) Comment on the status of the company’s cash budget for March.
CE21-2
Moorcroft Company’s budgeted sales and direct materials purchases are as follows:
Budgeted Sales Budgeted D.M. Purchases
April $300,000 $45,000
May 320,000 54,000
June 370,000 60,000
Moorcroft’s sales are 40% cash and 60% credit. Credit sales are collected 20% in the month of
sale, 50% in the month following sale, and 26% in the second month following sale; 4% are
uncollectible. Moorcroft’s purchases are 50% cash and 50% on account. Purchases on
account are paid 40% in the month following the purchase and 60% in the second month
following the purchase.
Instructions
(a) Prepare a schedule of expected collections from customers for June.
(b) Prepare a schedule of expected payments for direct materials for June.
(c) Moorcroft’s assistant controller suggested that Moorcroft hire a part time collector to
encourage customers to pay more promptly and to reduce the amount of uncollectible
accounts. Sales are still 40% cash and 60% credit but the assistant controller predicted
that this would cause credit sales to be collected 30% in the month of the sale, 50% in
the month following sale, and 18% in the second month following sale; 2% are
uncollectible.
(1) Prepare a schedule of expected collections from customers for June.
How did these changes impact cash collections? Would it be worth
paying the collector $1,000 per month?
(d) The assistant controller also suggested that the company switch their purchases to 40%
cash and 60% on account to help stretch out their cash payments. There is no
additional interest charge to do this and Moorcroft is still paying their bills on time. There
is no change to the company’s payment pattern.
(1) Prepare a schedule of expected payments for direct materials for June.
How did these changes impact the cash payments for June?
