Determining amount to borrow and pro forma financial statement balances
Athena Sudsberry owns a small restaurant in New York City. Ms. Sudsberry provided her accountant with the following summary information regarding expectations for the month of June. The balance in accounts receivable as of May 31 is $60,000. Budgeted cash and credit sales for June are $150,000 and $600,000, respectively. Credit sales are made through Visa and MasterCard and are collected rapidly. Eighty percent of credit sales is collected in the month of sale, and the remainder is collected in the following month. Ms. Sudsberry’s suppliers do not extend credit. Consequently, she pays suppliers on the last day of the month. Cash payments for June are expected to be $700,000. Ms. Sudsberry has a line of credit that enables the restaurant to borrow funds on demand; however, they must be borrowed on the last day of the month. Interest is paid in cash also on the last day of the month. Ms. Sudsberry desires to maintain a $30,000 cash balance before the interest payment. Her annual interest rate is 9 percent. Disregard any credit card fees.
Required
a.Compute the amount of funds Ms. Sudsberry needs to borrow for June, assuming that the beginning cash balance is zero.
b. Determine the amount of interest expense the restaurant will report on the June pro forma income statement.
c. What amount will the restaurant report as interest expense on the July pro forma income statement?
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