Assume D ean Consulting began January with $ 8000 cash. Management forecasts tha
ID: 2456420 • Letter: A
Question
Assume Dean Consulting began January with $ 8000 cash. Management forecasts that cash receipts from credit customers will be $50,000in January and $52,500 in February. Projected cash payments include equipment purchases $20,000 in January and $39,000 in February and selling and administrative expenses $12,000 each month). Dean 's bank requires a $28,000 minimum balance in the firm's checking account. At the end of any month when the account balance falls below $28,000 ,the bank automatically extends credit to the firm in multiples of $5,000. Dean borrows as little as possible and pays back loans each month in $1,000 increments, plus 66 % interest on the entire unpaid principal. The first payment occurs one month after the loan.
Requirements
1. Prepare Dean Consulting's cash budget for January and February 2018.
2. How much cash will Dean borrow in February
if cash receipts from customers that month total $17,500
instead of $52,500 ?
Explanation / Answer
Answer:
1. Preparation of Cash Budget for January and February 2018
Note 1: Calculation of Interest & Payment of Bank Loan
Total Loan Principal Outstanding at the end of February 2018 = $5,000
Interest on Total Principal Outstanding = 66% x $5,000 = $3,300
It is given in the question that Principal is paid in multiple of $1,000, hence the total payment to bank is as follows:
Total Payment to Bank for Loan (including interest) = Payment of Loan Principal + Payment of Interest on Loan = $1,000 + $3,300 = $4,300
2. Calculation of borrowing amount in February month, if cash receipts from customers that month total $17,500 instead of $52,500?
Particulars
Amount
A.
Opening Cash Balance of February Month
$31,000
B.
Cash Receipts from Customers
$17,500
C.
Total Payments
$51,000
D.
Balance at the end of month (A+B-C)
($2,500)
E.
Minimum Balance Requirement
$28,000
F.
Excess/ (Shortfall) from Minimum Balance Requirement (D-E)
($30,500)
G.
Borrowing from Bank (in multiple of $5,000)
$35,000
Dean Consulting will borrow $35,000 from bank in February month, if cash receipts from customers that month total $17,500 instead of $52,500.
Dean Consulting Cash Budget for January and February 2018 Particulars January, 2018 February, 2018 A. Opening Balance $8,000 $31,000 Projected Receipts: B. Receipts from Customer $50,000 $52,500 Projected Payments: Purchase of Equipment $20,000 $39,000 Selling and Administrative Expenses $12,000 $12,000 C. Total Projected Payment $32,000 $51,000 D. Balance at the end of month (A+B-C) $26,000 $32,500 E. Minimum Balance Requirement $28,000 $28,000 F. Excess/ (Shortfall) from Minimum Balance Requirement (D-E) ($2,000) $4,500 G. Borrowing from Bank (in multiple of $5,000) $5,000 $0 H. Payment of Bank Loan with interest $0 $4,300 I. Closing Balance to be carried forward next month (E+F+G-H) $31,000 $28,200Related Questions
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