Question

John Johnson has been working on Swifty Paints' cash budget for the coming year. Based on his projections for March, the beginning cash balance will be $45,700; cash collections will be $600,000; and cash disbursements will be $634,000. Swifty Paints desires to maintain a $43,000 minimum cash balance. The company has a 6% 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 Swifty Paints need to borrow from the bank at the beginning of March?
	Swifty Paints should borrow $enter the amount the company should borrow in dollars

(b)	Swifty anticipates having a positive $20,000 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?
	Principal to be repaid $enter the principal to be repaid in dollars Interest to be repaid $enter the interest to be repaid in dollars

Answer 1

a) Swifty Paints need to borrow $31500 from the bank at the beginning of March

	Particular	Amount ($)
	Beginning cash balance	45700
	Add : Cash collections	600000
	Less : Cash disbursement	-634000
	Less : Minimum Cash balance	-43000
	Shortage of Cash	-31300
	Amount To be borrowed from bank
	$31500 ( in $ 500 increments)

b ) Principal to be repaid : $ 19500

Interest to be repaid : $ 315

Calculation of march closing cash balance
Particular	Amount ($)
Beginning cash balance	45700
Add : Bank borrowings	31500
Add : Cash collections	600000
Less : Cash disbursement	-634000
Ending Cash balance	43200
Calculation Of Repayment
Opening Balance April	43200
Add : Net Cash flow	20000
less : Interest (31500*6%*2/12)	-315
Remaining Balance	62885
Less : Minimum Cash balance	-43000
	19885
Amount Of repayment : $ 19500 ( in $500 increments)
Amount Of interest To be repaid : $315

Bank Interest Rate = 6% Per annum