Question

The George Company has a policy of maintaining an end-of-month cash balance of at least $34,000. In months where a shortfall is expected, the company can draw in $1,000 increments on a line of credit it has with a local bank, at an interest rate of 12% per annum. All borrowings are assumed for budgeting purposes to occur at the beginning of the month, while all loan repayments (in $1,000 increments of principal) are assumed to occur at the end of the month. Interest is paid at the end of each month. For April, an end-of-month cash balance (prior to any financing and interest expense) of $21,000 is budgeted; for May, an excess of cash collected over cash payments (prior to any interest payments and loan repayments) of $25,000 is anticipated.

a. What is the interest payment estimated for April (there is no bank loan outstanding at the end of March)? (Do not round intermediate calculations.)

b. What is the total financing effect (cash interest plus loan transaction) for May? (Do not round intermediate calculations.)

Answer 1

Cash Budget for the month of May Particulars Amount Opening cash 34000 cash collected over payments 25000 Interest ( 13000 * 1%) -130 Net cash available 58870 Financing: Loan taken / (paid) -13000 Ending cash balance L 45870| >> Loan taken in the monthe of April = 34000 -21000 = 13000 >> Interest = 13000 * 12%* (1/12) Financing Activity Opening loan Loan taken Loan paid Closing loan April May o 13000 13000 ol -13000 130001