The George Company has a policy of maintaining an end-of-month cash balance of a
ID: 2563390 • Letter: T
Question
The George Company has a policy of maintaining an end-of-month cash balance of at least $37,000. 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 $20,000 is budgeted; for May, an excess of cash collected over cash payments (prior to any interest payments and loan repayments) of $24,000 is anticipated.
What is the interest payment estimated for April (there is no bank loan outstanding at the end of March)? (Do not round intermediate calculations.)
What is the total financing effect (cash interest plus loan transaction) for May? (Do not round intermediate calculations.)
The George Company has a policy of maintaining an end-of-month cash balance of at least $37,000. 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 $20,000 is budgeted; for May, an excess of cash collected over cash payments (prior to any interest payments and loan repayments) of $24,000 is anticipated.
Explanation / Answer
A. Bank loan outstanding at the end of March = 0
April months budgeted cash balance = 20,000
Desired end of month cash balance = 37,000
Defecit = 37,000 - 20,000 = 17,000
As there is defecit of 17,000, the amount has to be borrowed at the beginning of the month and the interest payments are made at the end of the month
The interest payment estimated for April = 17,000*12% = 2,040
B. Bank loan outstanding at the end of April = 17,000
May months budgeted cash balance = 24,000
Desired end of month cash balance = 37,000
Defecit = 37,000 - 24,000 = 13,000
As there is defecit of 13,000, the amount has to be borrowed at the beginning of the month and the interest payments are made at the end of the month
Loan for May = 13,000
Cash interest = (Interst for the amount borrowed in april) + (interst for the amount borrowed in may)
= (17,000*12%) + (13,000*12%) = 3,600
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