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 $56,000. Budgeted cash and credit sales for June are $147,000 and $594,000, respectively. Credit sales are made through Visa and MasterCard and are collected rapidly. Seventy five 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 $701,000. 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 $31,000 cash balance before the interest payment. Her annual interest rate is 9 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.)

4. 	a. Amount to be borrowed b. Interest expense (June) c. Interest expense (July)

Answer 1

Sol:

THE DETAILS PROVIDED IN THE QUESTIONS ARE AS FOLLOWS
BALANCE OF ACCOUNTS RECEIVABLES AS OF MAY 31	$       56,000.00
BUDGETED CASH SALES	$     147,000.00
BUDGETED CREDIT SALES	$     594,000.00
BUDGETED CASH PAYMENTS	$     701,000.00
DESIRED AMOUNT OF CASH END BALANCE	$       31,000.00

a. CALCULATION OF AMOUNT TO BE BORROWED
BUDGETED CASH PAYMENTS	$     701,000.00
DESIRED AMOUNT OF CASH END BALANCE	$       31,000.00
	$     732,000.00
LESS:
BALANCE OF ACCOUNTS RECEIVABLES AS OF MAY 31	$    56,000.00
BUDGETED CASH SALES	$ 147,000.00
BUDGETED CREDIT SALES (75% COLLECTION)	$     445,500.00
AMOUNT TO BE BORROWED	$       83,500.00

b. INTEREST EXPENSE FOR THE MONTH OF JUNE

SINCE THE AMOUNT IS BORROWED ON THE LAST DAY OF MONTH, IT'S INTEREST EXPENSE WILL DUE ON THE FOLLOWING MONTH. SO INTEREST AMOUNT IN THE MONTH OF JUNE IS $0

c. INTEREST EXPENSE FOR THE MONTH OF JULY
BORROWED AMOUNT	$       83,500.00
INTEREST RATE	9% p.a
INTEREST AMOUNT	$             626.25