Question

The city of Charleston had the following sales of water for the selected months of 2017: Month February March Sales $60,000 45,000 60,000 42,500 April May June 100,000 120,000 July All sales are on credit. Historically, 60 percent is collected in the month of sale, 30 percent during the first month following the sale, and 10 percent in the second month following the sale. Water purchases by month are as follows: Month February $60,000 March April 40,000 45,000 59,750 52,500 May June July 90,000 Water is purchased in the month of sale. All purchases are paid during the month following the purchase. Operating costs are $18,000 and everything is paid in cash except for depreciation, which totals $8,000 a month. The city plans on purchasing some new equipment in May for $25,000 in exchange for a note payable. The April 1 cash balance is expected to be $5,000. The city must maintain a minimum cash balance of $10,500, and money can be borrowed from a local bank in increments of $1,000. The city borrows money at the beginning on the first day of the month and repays loans and interest on the last day of the month. The bank charges the city an annual interest rate of 15%.

Answer 1

April May Quarter June Beginning Cash Balance 5,000 10,500 48,000 5,000 10,500 Cash collections 55,500 (40,000) (10,000) 78,750 182,250 (144,750) (59,750) Water disbursements (45,000) (10,000) Operating costs (30,000) (10,000) Borrowings Repayments Interest 7,000 7,000 (7,000) (175) (7,000) (175) Ending Cash Balance 10,500 10,500 12,325 12,325 Working Notes Cash Collections April May June February sale (60,000 x 10% ) 6,000 March Sales (45,000 x 30%) 13,500 (45,000 x 10%) Aprl Sale (60,000 x 60%) (60,000 x 30%) (60,000 x 10%) May Sale (42,500 x 60%) (42,500 x 30%) 4,500 36,000 18,000 6,000 25,500 12,750 June Sale (100,000 x 60 %) 60,000 Total 55,500 48,000 78,750

Operating Cost April May 18,000 (8,000) June Total Less: Depreciation 18,000 18,000 (8,000) (8,000) Cash payment of Operating costs 10,000 10,000 10,000 Calculation of Borrowings/(Repayment) April May June Beginning Cash Balance Cash collections 5,000 10,500 10,500 55,500 (40,000) (10,000) 48,000 78,750 (45,000) (10,000) Water disbursements (59,750) Operating costs Excess/(Short) (10,000) 19,500 10,500 3,500 (10,500) (10,500) Less: Minimum cash balance (10,500) (Borrowings)/Repayment required (7,000) 9,000 Calculation of Interest Borrowings made on May 7,000 Interest rate p.a 15% Interest for 2 months (May & June) (7,000 x 15% x 2/12) X 175