Question

Exercise 7-17

Preparation of cash budgets (for three periods) LO P2 Kayak Co. budgeted the following cash receipts (excluding cash receipts from loans received) and cash payments (excluding cash payments for loan principal and interest payments) for the first three months of next year.

Cash Receipts Cash payments

January $ 522,000 $ 463,300

February $402,500 $343,800

March $472,000 $524,000

According to a credit agreement with the company’s bank, Kayak promises to have a minimum cash balance of $50,000 at each month-end. In return, the bank has agreed that the company can borrow up to $150,000 at a monthly interest rate of 1%, paid on the last day of each month. The interest is computed based on the beginning balance of the loan for the month. The company repays loan principal with any cash in excess of $50,000 on the last day of each month. The company has a cash balance of $50,000 and a loan balance of $100,000 at January 1. Prepare monthly cash budgets for January, February, and March. (Negative balances and Loan repayment amounts (if any) should be indicated with minus sign.)

Answer 1

Solution:

Cash Budget
	January	February	March
Cash balance at beginning	$50,000	$50,700	$65,970
Add: cash receipts	$522,000	$402,500	$472,000
Total cash available	$572,000	$453,200	$537,970
Less: Cash Disbursements
Cash Payments	$463,300	$343,800	$524,000
Interest Payments	$1,000	$430	$364
Total Cash Disbursements	$464,300	$344,230	$524,364
Excess (deficiency) of cash available over disbursements	$107,700	$108,970	$13,606
Financing:
Borrowings			$36,394
Repayments	-$57,000	-$43,000
Interest on Borrowing
Total Finiancing	-$57,000	-$43,000
Cash balance, ending	$50,700	$65,970	$50,000
Note:
Interest Expense for January = $100,000*1% = $1,000
Interest Expense for February = $43,000*1% = $430
Interest Expense for March = $36,394*1% = $364
LOAN BALANCES
	January	February	March
Beginning loan balance	$100,000	$43,000	36394
Repayment	($57,000)	($43,000)	0
Ending Loan Balance	$43,000	$0	$36,394

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