Question

The George Company has a policy of maintaining an end-of-month cash balance of at least $40,000. In months where a shortfall is expected, the company can draw in $1,000 increments on a line of credit it has with a local bank, at an interest rate of 12% per annum. All borrowings are assumed for budgeting purposes to occur at the beginning of the month, while all loan repayments (in $1,000 increments of principal) are assumed to occur at the end of the month. Interest is paid at the end of each month. For April, an end-of-month cash balance (prior to any financing and interest expense) of $14,000 is budgeted; for May, an excess of cash collected over cash payments (prior to any interest payments and loan repayments) of $31,200 is anticipated.
a. What is the interest payment estimated for April (there is no bank loan outstanding at the end of March)? (Do not round intermediate calculations.)
b. What is the total financing effect (cash interest plus loan transaction) for May? (Do not round intermediate calculations.)

Answer 1

Answer:

A.$130

B. $13,130

Explanation:

Loan taken at the beginning of april in order to maintain cash balance of $40,000 = $40,000 - $27,200 = $12,800 = $13,000 (Increment of $1,000)

Interest payment estimated for april = $13,000*12%*1/12 = $130

Solution b:

Cash balance at the end of april = $27,200 + $13,000 - $130 = $40,070

Cash balance at the end of may before financing effect = Cash balance at the beginning + Excess of cash collected over cash payments

= $40,070 + $31,200 = $71,270

Total financin effect for may = Loan repayment + Interest repayment = $13,000 + $13,000*12%*1/12 = $13,130