Question

Following are the budgeted income statements for the second quarter of 2019 for SeaTech Inc.:

	April				May				June
Sales	$	210,000			$	255,000			$	285,000
Cost of goods sold*		144,000				171,000				189,000
Gross profit	$	66,000			$	84,000			$	96,000
Operating expenses†		33,000				37,500				40,500
Operating income	$	33,000			$	46,500			$	55,500

^* Includes all product costs (i.e., direct materials, direct labor, and manufacturing overhead).
^† Includes all period costs (i.e., selling, general, and administrative expenses).

The company expects about 30% of sales to be cash transactions. Of sales on account, 60% are expected to be collected in the first month after the sale is made, and 40% are expected to be collected in the second month after sale. Depreciation, insurance, and property taxes represent $18,000 of the estimated monthly cost of goods sold and $12,000 of the estimated monthly operating expenses. The annual insurance premium is paid in January, and the annual property taxes are paid in August. Of the remainder of the cost of goods sold and operating expenses, 80% are expected to be paid in the month in which they are incurred, and the balance is expected to be paid in the following month.

Current assets as of April 1, 2019, consist of cash of $21,000 and accounts receivable of $224,700 ($157,290 from March credit sales and $67,410 from February credit sales). Current liabilities as of April 1 consist of $27,000 of accounts payable for product costs incurred in March; $6,900 of accrued liabilities for operating expenses incurred in March; and a $60,000, 14%, 120-day note payable that is due on April 17, 2019.

An estimated income tax payment of $60,000 will be made in May. The regular quarterly dividend of $24,000 is expected to be declared in May and paid in June. Capital expenditures amounting to $25,800 will be made in April.

Required:
a. Complete the monthly cash budgets for the second quarter of 2019 using the following format. Note that the ending cash balance for June is provided as a check figure. (Use 360 days year for calculations.)

b. Assume that management of SeaTech Inc. desires to maintain a minimum cash balance of $18,800 at the beginning of each month and has arranged a $100,000 line of credit with a local bank at an interest rate of 10% to ensure the availability of funds. Borrowing transactions are to occur only at the end of months in which the budgeted cash balance would otherwise fall short of the $18,800 minimum balance. Repayments of principal and interest are to occur at the end of the earliest month in which sufficient funds are expected to be available for repayment. (Do not round intermediate calculations. Use 360 days year for calculations.)

Answer 1

Answer for A

1. Schedule of Cash collections for APRIL, MAY & JUNE April May $ 210,000 $255,000 June TOTAL $285,000 $750,000 Sales Revenue Cash collected from Cash Sales During the month of Sale = Sales Revenue x 30% B $ 63,000 $ 76,500 $ 85,500 $225,000 Cash collected for Credit Sales February sales March sales April Sales May sales $ 67,410 $ 94,374 $ 62,916 $ 88,200 $ 67,410 $ 157,290 $ 147,000 $ 107,100 $ 58,800 $ 107,100 Total Cash receipts F=B+D+E $ 224,784 $ 227,616 $ 251,400 $ 703,800 Out of Account receivable of February will collect in April. So, Total Account receivable of February shown under Aprill. Out of Account receivables of March, 60% will be collected in April & 40% will be collected in May. For April, May & June, sales for respective months 30% already collected. So, 70% of sales are credit. Out of credit sales 60% will be collected in Next month & 40% will be collected in Month after next month.

Answer for B

5. Cash budget April $ 21,000 May Jun $ 19,684 $ 19,100 TOTAL $ 21,000 Opening cash balance $ 224,784 $ 227,616 $ 251,400 $ 703,800 Cash collected from sales As per Schedule of cash collected from sales $ 245,784 $ 247,300 $ 270,500 $724,800 Total cash receipts = Opening cash balance + Cash collected from sales Cash disbursements for COGS & Operating expenses $ 151,500 As per Schedule for Cash disbursements for merchandise purchases $ 172,200 $ 195,300 $519,000 Cash disbursements for Other expenses As per Schedule for Cash disbursements for Others $ 88,600 $ 60,000 $ 24,000 $172,600 Net cash available $ 5,684 $ 15,100 $ 51,200 $ 33,200 Minimum cash balance $ 18,800 $ 18,800 $ 18,800 $ - Cash (short fall) / excess = Net cash avaialble - Minimum cash balance $ (13,116) $ (3,700) $ 32,400 $ . $ 14,000 $ 4,000 $ (18,000) $ - Cash to be borrowed from bank/(repaid) to bank = Round up to next 1,000 of Cash (short fall) Interest on Borrowing $ (259) $ (259) = ( Cash to be borrowed from bank in April x 10%) + (Upto May x 10%) = ( $14,000 x 10% x 30 )/360 + [ ($14,000+ $4,000) 10% x 30)/360 ] = $ 117 + $ 142 Cash Closing balance $ 19,684 $ 19,100 $ 32,941 $ 32,941 = Net cash avaialble + Cash to be borrowed from bank-repaid to bank - Interest on borrowing

2. Schedule for Cash disbursements for COGS & Operating expense for the month APRIL, MAY & JUNE March April $ 144,000 May $171,000 Jun $ 189,000 TOTAL $504,000 Cost of goods sold Operating expenses $ 33,000 $ 37,500 $ 40,500 $ 111,000 Total Expenses $ 177,000 $ 208,500 $ 229,500 $ 615,000 $ 30,000 $30,000 $ 30,000 $ 90,000 Depreciation, insurance & property taxes = $ 18,000 + $ 12,000 Cost of goods sold & Operating expenses $ 147,000 $ 178,500 $ 199,500 $525,000 $ 117,600 $ 142,800 $ 159,600 $ 420,000 Cash payment pertaining to current month = Cost of goods sold & Operating expenses x 80% Cash payment pertaining to last month $ 33,900 $ 29,400 $ 35,700 $ 99,000 = Last month Cost of goods sold & Operating expenses x 20% March accounts payable paid in April ($ 27,000 + $ 6,900) Cash disbursements for COGS & Operating expenses $ 151,500 $ 172,200 $ 195,300 $519,000 = Cash payment pertainting to current month + Cash payment pertaining to Last month

3. Schedule for Other Cash disbursements for the month APRIL, MAY & JUNE April - $ May $ 60,000 $ Jun - TOTAL $ 60,000 Income tax payment Dividend $ - $ - $ 24,000 $ 24,000 Notes payable = 60,000+ [160,000 x 14% x 120 )/360 ] Capital expenditure $ 62,800 $ $ 25,800 $ - - $ $ - - $ 62,800 $ 25,800 Cash disbursements for Other expenses $ 88,600 $ 60,000 $ 24,000 $172,600

4. Cash budget April May $ 21,000 $ 5,684 $ Jun TOTAL 1,100 $ 21,000 Opening cash balance $ 224,784 $ 227,616 $ 251,400 $ 703,800 Cash collected from sales As per Schedule of cash collected from sales $ 245,784 $ 233,300 $ 252,500 $724,800 Total cash receipts = Opening cash balance + Cash collected from sales Cash disbursements for COGS & Operating expenses $ 151,500 $ 172,200 $ 195,300 $519,000 As per Schedule for Cash disbursements for merchandise purchases $ 88,600 $ 60,000 $ 24,000 $172,600 Cash disbursements for Other expenses As per Schedule for Cash disbursements for Others Net cash available $ 5,684 $ 1,100 $ 33,200 $ 33,200