Chapter 22: Q29E (page 1235)

Preparing the financial budget鈥攃ash budget Hoppy Company requires a minimum cash balance of $3,500. When the company expects a cash deficiency, it borrows the exact amount required on the first of the month. Expected excess cash is used to repay any amounts owed. Interest owed from the previous month鈥檚 principal balance is paid on the first of the month at 14% per year. The company has already completed the budgeting process for the first quarter for cash receipts and cash payments for all expenses except interest. Hoppy does not have any outstanding debt on January 1. Complete the cash budget for the first quarter for Hoppy Company. Round interest expense to the nearest whole dollar.

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Answer

Total cash balance is $3,500

Step by step solution

HOPPY COMPANY Cash Budget For the three months ended March 31
Particulars	January	February	March	Total
Beginning cash balance	$3,500	$3,500	$3,500	$3,500
Cash receipts	$19,000	$27,500	$42,000	$88,500
Cash available	$22,500	$31,000	$45,500	$99,000
Cash payments:
All expenses except interest	$34,000	$35,000	$39,000	$108,000
Interest Expense	$0	$175	$265	$440
Total cash payments	$34,000	$35,175	$39,265	$108,440
Ending cash balance before financing	($11,500)	(4,175)	$6,235	($9,440)
Minimum cash balance desired	($3,500)	($3,500)	($3,500)	($3,500)
Projected cash excess (deficiency)	($15,000)	($7,675)	$2,735	($29,380)
Financing
borrowing	$15,000	$7,675	$0	$22,675
Principal repayments	$0	$0	$2,735	($2,735)
Total effects of financing	$15,000	$7,675	$2,735	$19,940
Ending cash balance	$3,500	$3,500	$3,500	$3,500

Interest expenses (February) = Borrowings x rate x time

= $15,000 x 14% x 1/12

= $175

Interest expenses (March) = Interest (February) + Borrowings x rate x time

= $15,000 x 14% x 1/12 + $7,675 x 14% x 1/12

= $175 + 90

= $265

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