Question

Lois Bragg owns a small restaurant in Boston. Ms. Bragg 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 $57,000. Budgeted cash and credit sales for June are $148,000 and $599,000, respectively. Credit sales are made through Visa and MasterCard and are collected rapidly. Sixty percent of credit sales is collected in the month of sale, and the remainder is collected in the following month. Ms. Bragg'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 $707,000. Ms. Bragg 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. Bragg desires to maintain a $39,000 cash balance before the interest payment. Her annual interest rate is 12 percent.

Required

1. Compute the amount of funds Ms. Bragg needs to borrow for June.

2. Determine the amount of interest expense the restaurant will report on the June pro forma income statement.

3. What amount will the restaurant report as interest expense on the July pro forma income statement? (Round your answers to 2 decimal places.)

Answer 1

a) calculation of amount to be Borrowed
Cash collection:
Collection from May's receivables balance	$57,000
Collection from June's credit sales ($599,000 × 60%)	$359,400
Cash sales from June	$148,000
A. Total cash receipts	$564,400
Desired cash balance (B)	$39,000
Cash Disbursement ( C )	$707,000
D.Total cash needs (B + C)	$746,000
Cash Shortage (D - A)	$181,600
Ms. Lois Bragg needs to borrow $181,600 for June.
b)
Since, amount is borrowed on the last day in the month of june, Interest Expense   = $0
c)
Interest Expense in July   = Amount borrowed X 12% X 1/12 months                                                    = $181,600 x 12% x 1/12                                                   = $1,816
Interest Expense in July = $1,816