Question

Patricia’s housekeeping company has the following data projected for June. Beginning cash balance $24,500 Cash collections from customers 36,200 Cash disbursements 54,300 Patricia wants to maintain a cash balance of $10,000 or more. Any amount below this can be borrowed from a local bank as needed in increments of $1,000. All borrowings are made at month end. In Patricia's cash budget for June, how much money will Patricia need to borrow at month end? A. $6,000 B. $5,000 C. $7,000 D. $4,000

Answer 1

Patricia's housekeeping company wants to maintain a cash balance of $ 10,000 or more. If there is any shortage, then $ 1,000 in increments are to be borrowed inorder to have minimum cash balance. For example, if there is shortage of $500, then the company want to borrow $ 1,000 because only increments of $ 1,000 can be borrowed. So coming to the question,

Opening cash balance = $ 24,500.

Cash collections = $ 36,200.

Cash disbursements = $ 54,300.

So,

Closing balance = Opening balance + cash collections - cash disbursements.

Closing balance = 24,500+36,200-54,300

Closing balance = $ 6,400.

So company is having only $ 6,400 as closing balance. So they need to buy $ 3,600 inorder to get minimum balance of $ 10,000. But it is said that only increments of $ 1,000 can be borrowed from bank. So the company need to borrow $ 4,000 from bank so that the new ending balance will be $ 10,400.

Hence, option D is the correct answer.

SUMMARY:

Company is having shortage of $ 3,600. So it is said that only increments of $1,000 can be borrowed. If company borrows $3,000, then the ending balance will be only $ 9,400 which also results in shortage. So $4,000 is the amount needed to borrow from the local bank so that they can maintain atleast minimum balance of $10,000 or more.

Hence, option D is the correct answer.

That is $ 4,000 need to borrowed.