Question

Harley Company requires a minimum cash balance of $5,000. When the company expects a cash deficiency, it borrows the exact amount required on the first of the month. Expected excess cash is used to repay any amounts owed. Interest owed from the previous month's principal balance is paid on the first of the month at 12% per year. The company has already completed the budgeting process for the first quarter for cash receipts and cash payments for all expenses except interest. (Click the icon to view the completed budget information.) Harley does not have any outstanding debt on January 1. Complete the cash budget for the first quarter for Harley Company. Round interest expense to the nearest whole dollar. Begin by preparing the cash budget for January, then prepare the cash budget for February and March. Finally, prepare the totals for the quarter. (Complete all answer boxes. Enter a "0" for any zero balances. Round all amounts entered into t cash budget to the nearest whole dollar. Enter a cash deficiency and/or negative effects of financing with a minus sign or parentheses.) A Data Table Harley Company Cash Budget For the Three Months Ended March 31 January Beginning cash balance 5,000 18,000 Cash receipts Harley Company Cash Budget For the Three Months Ended March 31 January February Cash available 23,000 March Total Cash payments: Beginning cash balance All expenses except interest 35,000 5,000 18,000 26,000 40,000 84,000 Interest expense 23,000 35,000 Total cash payments Ending cash balance before financing Cash receipts Cash available Cash payments: All expenses except interest 35,000 30,000 32,000 97,000 Minimum nach balanse desired (5,000) Interest expense Enter any number in the edit fields and then click Check Answer. 35,000 Total cash payments Ending cash balance before financing parts remaining Minimum cash balance desired (5,000) (5,000)| (5,000) (5,000) ||

Answer 1

Harley company Cash budget for the quarter ended 31St march
Particulars	Jan($)	Feb($)	March($)	Total($)
Beginning Cash Balance	5,000	5,000	5,000	15,000
Cash Receipts	18,000	26,000	40,000	84,000
Cash Available	23,000	31,000	45,000	99,000
Cash Payments:
All expenses except interest	35,000	30,000	32,000	97,000
Interest Expense	0	170	212	382
Total cash payments	35,000	30,170	32,212	97,382
Ending Cash Balance before financing	(12,000)	830	12,788	1,618
Minimum Cash Balance desired	(5000)	(5000)	(5000)	(5000)
Projected Cash Excess (deficiency)	(17,000)	(4,170)	7,788	13,382
Financing:
Borrowing	17,000	4,170	0	21,170
Principal Repayments	0	0	7,788	7,788
Total Effect of Financing	17,000	4,170	(7,788)	13,382
Ending Cash Balance	5,000	5,000	5,000	5,000

Explanation and Calculation:

Always while preparing budgets for 2 or more months or years, first prepare the budget for the first month ( here for the month of jan ) complete till the end then take the ending balance and apply it as opening balance of second month ( here feb ) and continue it similarly till you complete the budget for desired months.

January:

Here Opening Cash Balance, Cash receipts, Cash Available and all expenses except interest for the month of Jan is given in the question. Next is Interest expense for Jan which is $0 because it is mentioned in the question that the Harley does not have any outstanding borrowing for the month of Jan. So, the total cash payments remains as $35,000.

The ending cash balance before financing = Cash Available - Total Cash Payments = $23,000 - $35,000 = $(12,000)

We already have a negative cash balance / deficiency of $12,000 and Harley has a policy of maintaining minimum cash balance of $5,000. So inorder to cover the cash deficiency of $12,000 and have a minimum cash balance of $5,000 Harley needs a total of $17,000. So It Borrows $17,000. As the company neither has any outstanding balance nor excess cash to pay any loan the principal repayments is $0 Which makes the Total effects of Financing in the month of Jan $17,000.

Ending Cash Balance is $5,000 because as mentioned earlier Harley has a policy of maintaining minimum cash balance of $5,000. Out of $17,000 borrowing $12,000 is used to pay the excess cash payments and $5,000 is retained as closing Cash balance.

February:

The opening Cash Balance is $5,000 because the Opening Cash balance is nothing but the closing Cash balance of Jan. Cash receipts is given as $26,000 so the available cash is $31,000. all expenses except interest is given as $30,000.

we need to calculate the interest expense because the company has borrowed $17,000 in the month of Jan. Interest is given as 12% per year.

Interest Expense = (17,000 * 12%) / 12 = $2,040 /12 = 170

Interest is divided by 12 because interest of 12% is for one year but we need to calculate interest for one month ( i.e) for Feb alone.

So, With interest expense of $170 the total payments amounts to $30,170. The cash balance for Feb is positive (i.e) we have excess cash balance of $830 but the company needs to maintain minimum cash balance of $5,000 so it has to borrow $4,170 ( $5,000 - $830) to Maintain the minimum cash balance.

Though the company has any outstanding balance of Borrowing of $17,000 it does not have excess cash to pay any loan. so, the principal repayments is $0 Which makes the Total effects of Financing in the month of Feb as $4,170.

Ending Cash Balance is $5,000 because as mentioned earlier Harley has a policy of maintaining minimum cash balance of $5,000. Along with the Borrowing of $4,170 and Excess cash Balance of $830 the company has ending cash balance as $5,000.

March:

The opening Cash Balance is $5,000 because the Opening Cash balance is nothing but the closing Cash balance of Feb. Cash receipts is given as $40,000 so the available cash is $45,000. all expenses except interest is given as $32,000.

we need to calculate the interest expense because the company has borrowed $21,170 ($17,000 for jan + $4,170 for Feb). Interest is given as 12% per year. As we didnt repay the Jan borrowing the outstanding borrowing for the month of March is the total of Jan and Feb Borrowing.

Interest Expense = (21,170 * 12%) / 12 = $2,540 /12 = $212

Here also Interest is divided by 12 because interest of 12% is for one year but we need to calculate interest for one month (i.e) for march alone.

So, With interest expense of $212 the total payments amounts to $32,212. The cash balance for March is positive (i.e) we have excess cash balance of $12,788. the company needs to maintain minimum cash balance of $5,000 which leaves the company with excess cash of $7,788. as mentioned in the question this excess cash is used to repay outstanding borrowing.

As the company has excess cash in the month of March there is no need for borrowing. So the total of effects of financing is repayment of $7788. and Ending cash balance is $5,000.

Total:

For the total column just add all the 3 months amount of respective category. For Eg. Total Cash Receipts is $84,000 which is nothing but the total of cash receipts of Jan, Feb and March.

Only difference is Minimum cash Balance desired even at the end of the quarter is $5,000 Just because it is the end of the quarter the company need not have 3 times the required minimum cash balance.