Jason Allen has been working on Vaughn Paints' cash budget for the coming year. Based on...
Jason Allen has been working on Vaughn Paints' cash budget for
the coming year. Based on his projections for March, the beginning
cash balance will be $45,700; cash collections will be $520,000;
and cash disbursements will be $554,000. Vaughn Paints desires to
maintain a $40,000 minimum cash balance. The company has a 6% open
line of credit with its bank, which provides short-term borrowings
in $500 increments. All borrowings are made at the beginning of the
month, and all repayments are made at the end of the month (in $500
increments). When partial payments are made against the line of
credit, accrued interest applicable to the full amount due through
that date is paid along with the partial principal
repayment.
| (a) | How much will Vaughn Paints need to borrow from the bank at the beginning of March? | |||||
|
| (b) | Vaughn anticipates having a positive $20,000 net cash flow from April activities. How much of the line of credit from March can be repaid? How much interest will be repaid in April? | ||||||||||
|
Homework Answers
Answer a.
Total Cash available = Beginning Cash Balance + Cash
Collection
Total Cash available = $45,700 + $520,000
Total Cash available = $565,700
Excess (deficit) of Cash available over disbursement = Total
Cash available - Cash Disbursements
Excess (deficit) of Cash available over disbursement = $565,700-
$554,000
Excess (deficit) of Cash available over disbursement = $11,700
Minimum Cash Balance = $40,000
Financing required = Minimum Cash Balance - Excess (deficit) of
Cash available over disbursement
Financing required = $40,000- $11,700
Financing required =$28,300
So, Vaughn Paints should borrow $28,300
Answer b.
Annual Interest Rate = 6%
Monthly Interest Rate = 0.5%
Interest due = 0.5% * $28,300 * 2
Interest due = $283
Since principal to be repaid in incremental of $500
Excess cash available :$20,000-$283=$19,717
Principal Repaid = $19,500
Interest to be repaid = $283
Add Answer to:
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