Question

Exercise D5-26 Will Benjamin has been working on Bramble Paints' cash budget for the coming year. Based on his projections for March, the beginning cash balance will be $50,181; cash collections will be $700,000; and cash disbursements will be $710,430. Bramble Paints desires to maintain a $50,000 minimum cash balance. The company has a 10% open line of credit with its bank, which provides short-term borrowings in $500 increments. All borrowings are made at the beginning of the month, and all repayments are made at the end of the month (in $500 increments). When partial payments are made against the line of credit, accrued interest applicable to the full amount due through that date is paid along with the partial principal repayment. (a) How much will Bramble Paints need to borrow from the bank at the beginning of March? Bramble Paints should borrow $ (b) Bramble anticipates having a positive $7,000 net cash flow from April activities. How much of the line of credit from March can be repaid? How much interest will be repaid in April? (Round interest repaid answer to the nearest whole dollar amount, e.g. 5,275.) Principal to be repaid $ Interest to be repaid $

Answer 1

a) Excess or deficiency of cash for March = Beg. Cash Bal+Cash Collections-Cash Disbursements

= $50,181+$700,000-$710,430 = $39,751

Minimum cash balance required = $50,000

Shortage of cash balance = $50,000 - $39,751 = $10,249

As the cash is borrowed in the increments of $500, the amount of borrowings at the beginning of March will be $10,500.

b) The opening cash balance for the month of april will be $50,000 and positive cash flow of 7,000 implies that there is an excess amount of $7,000 over the minimum required cash of $50,000. The repayment of interest and partial principal payments will be from total amount of $7,000 in the month of april

Accrued Interest on Short term borrowings for march and april = Amount of Borrowings*10%*2/12

= $10,500*10%*2/12 = $175

Partial Principal payments at the end of April = $7,000 - $175 = $6,825

Thus interest to be repaid in April will be $175 and principal to be repaid will be $6,825.