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 during the month of sale, and 70% of the resulting billings will be collected during the same month. 90% of the remaining balance should be collectable in the next following month. 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 $3,000,000 and remain the same in July and August.

Estimate the monthly cash collections for August. An example for June and July follows:

June	July	August
$3,000,000 X .7 = $2,100,000 (June receivables collected in June). This leaves $900,000 yet to be collected.	$3,000,000 X .7 = $2,100,000 (July billings collected in July). In addition, 90% of June’s uncollected receivables will be collected: $900,000 X .9 = $810,000. $2,100,000 + $810,000 = $2,910,000 will be collected in July. ($90,000 will never be collected)

Without performing calculations, how would the answer change if Logan bills customers in the month following the month of sale?

Answer 1

Answer a.

Cash Collection in June = 70% * June Sales
Cash Collection in June = 70% * $3,000,000
Cash Collection in June = $2,100,000

Cash Collection in July = 70% * July Sales + 90% * 30% * June Sales
Cash Collection in July = 70% * $3,000,000 + 90% * 30% * $3,000,000
Cash Collection in July = $2,910,000

Cash Collection in August = 70% * August Sales + 90% * 30% * July Sales
Cash Collection in August = 70% * $3,000,000 + 90% * 30% * $3,000,000
Cash Collection in August = $2,910,000

Answer b.

If Logan bills customers in the month following the month of sales, then June collection will be $0, July collection will be $2,100,000 and August collection will be $2,910,000