Chapter 8, Problem 25E

Refer to Exercise 8.24. Del Spencer’s purchases clothing evenly throughout the month. All purchases are on account. On the first of every month, Jana Spencer, Del’s wife, pays for all of the previous month’s purchases. Terms are 2/10, n/30 (i.e., a 2 percent discount can be taken if the bill is paid within 10 days; otherwise, the entire amount is due within 30 days).

The forecast purchases for the months of May through September are as follows:

Required:

1. 1. Prepare a cash disbursements schedule for the months of August and September. (Round all cash amounts to the nearest dollar.)
2. 2. Now, suppose that Del wants to see what difference it would make to have someone pay for any purchases that have been made three times per month, on the 1st, the 11th, and the 21st. Prepare a cash disbursements schedule for the months of July and August assuming this new payment schedule. (Round all cash amounts to the nearest dollar.)
3. 3. Suppose that Jana (who works full-time as a school teacher and is the mother of two small children) does not have time to make payments on two extra days per month and that a temporary employee is hired on the 11th and 21st at $20 per hour, for four hours each of those two days. Is this a good decision? Explain.

Del Spencer is the owner and founder of Del Spencer’s Men’s Clothing Store. Del Spencer’s has its own house charge accounts and has found from past experience that 10 percent of its sales are for cash. The remaining 90 percent are on credit. An aging schedule for accounts receivable reveals the following pattern:

15 percent of credit sales are paid in the month of sale.

65 percent of credit sales are paid in the first month following the sale.

14 percent of credit sales are paid in the second month following the sale.

6 percent of credit sales are never collected.

Credit sales that have not been paid until the second month following the sale are considered overdue and are subject to a 3 percent late charge.

Del Spencer’s has developed the following sales forecast:

Required:

Prepare a schedule of cash receipts for August and September.

To determine

Prepare a cash disbursement schedule for the month of August and September.

Explanation of Solution

Schedule of cash payments for purchases: This Schedule is prepared for the estimation of the cash payment for purchase for the period. This includes all probable cash payment.

Budgeted cash disbursement: Budgeted cash disbursements are the cash outflows expected for a budgeted period.

Prepare a cash disbursement schedule for the month of August and September:

DP Clothing Store
Schedule of Cash Disbursement
For the Months of August and September
Particulars	August	September
July:	7,350	-
	15,000
August:	-	9,147
	-	18,667
Total cash disbursements	$22,350	$27,814

Table (1)

Working note 1:

Calculate the amount of cash paid for purchases:

 For 1/3 of July purchases are paid in August:

$\begin{array}{c}\text{1/3 of July purchases are paid in August = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of July}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$22,500\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$7,500\times \text{98 \%}\\ =\$7,350\end{array}$

For 2/3 July purchases are paid in August:

$\begin{array}{c}\text{2/3 of July purchases are paid in August = }\left[\left(\begin{array}{l}\text{Purchases for the month of July}\\ \times \frac{\text{2 }}{3}\end{array}\right)\right]\\ \text{= }\left[\left(\$22,500\times \frac{\text{2 }}{3}\right)\right]\\ =\$15,000\end{array}$

Working note 2:

Calculate the amount of cash paid for purchases:

 For 1/3 of August purchases are paid in September:

$\begin{array}{c}\begin{array}{l}\text{1/3 of August purchases }\\ \text{are paid in September}\end{array}\}\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of August}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$28,000\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$9,333\times \text{98 \%}\\ =\$9,147\end{array}$

For 2/3 August purchases are paid in September:

$\begin{array}{c}\begin{array}{l}\text{2/3 of August purchases}\\ \text{are paid in September }\end{array}\}\text{= }\left[\left(\begin{array}{l}\text{Purchases for the month of August}\\ \times \frac{\text{2 }}{3}\end{array}\right)\right]\\ \text{= }\left[\left(\$28,000\times \frac{\text{2 }}{3}\right)\right]\\ =\$18,667\end{array}$

To determine

Prepare a cash disbursement schedule for the month of July and August (if payment made three times per month).

Explanation of Solution

Prepare a cash disbursement schedule for the month of July and August (if payment made three times per month):

DP Clothing Store
Schedule of Cash Disbursement
For the Months of August and September
Particulars	July	August
July 1:	8,983
July 11:	7,350
July 21:	7,350
August 1:		7,350
August 11:		9,147
August 21:		9,147
Total cash disbursements	$23,683	$25,644

Table (2)

Working note 1:

Calculate the amount of cash paid for purchases:

 For 1/3 of July purchases are paid in July 1:

$\begin{array}{c}\text{1/3 of July purchases are paid in July 1 = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of June}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$27,500\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$9,167\times \text{98 \%}\\ =\$8,983\end{array}$

For 1/3 of July purchases are paid in July 11:

$\begin{array}{c}\text{1/3 of July purchases are paid in July 11 = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of July}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$22,500\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$7,500\times \text{98 \%}\\ =\$7,350\end{array}$

For 1/3 of July purchases are paid in July 21:

$\begin{array}{c}\text{1/3 of July purchases are paid in July 21 = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of July}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$22,500\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$7,500\times \text{98 \%}\\ =\$7,350\end{array}$

Working note 2:

Calculate the amount of cash paid for purchases:

For 1/3 of August purchases are paid in August 1:

$\begin{array}{c}\text{1/3 of August purchases are paid in August 1 = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of July}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$22,500\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$7,500\times \text{98 \%}\\ =\$7,350\end{array}$

For 1/3 of August purchases are paid in August 11:

$\begin{array}{c}\begin{array}{l}\text{1/3 of August purchases}\\ \text{are paid in August 11 }\end{array}\}\text{= }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of August}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$28,000\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$9,333\times \text{98 \%}\\ =\$9,147\end{array}$

For 1/3 of August purchases are paid in August 21:

$\begin{array}{c}\begin{array}{l}\text{1/3 of August purchases}\\ \text{are paid in August 21 }\end{array}\}\text{= }\left[\begin{array}{l}\left(\begin{array}{l}\text{Purchases for the month of August}\\ \times \frac{1}{3}\end{array}\right)\\ \times \text{After discount \%}\end{array}\right]\\ \text{= }\left[\left(\$28,000\times \frac{1}{3}\right)\times \text{98 \%}\right]\\ =\$9,333\times \text{98 \%}\\ =\$9,147\end{array}$

To determine

Explain whether the decision taken by J is good for making the payment.

Explanation of Solution

Explain whether the decision taken by J is good for making the payment:

Yes. It is considered as a good idea. As long as monthly purchases exceed $8,000 $\left(\frac{\$160}{0.02}\right)$  because amount saved from availing the cash discount of 2% which will be more than the amount paid for clerk.

Hence, J can temporarily appoint employee who work for 11^th and 21^st date for four hours at $20 per hour.