Castor, Inc. is preparing its master budget for the quarter ended June 30. Budge

Question

Castor, Inc. is preparing its master budget for the quarter ended June 30. Budgeted sales and cash payments for merchandise for the next three months follow:

  

       

Sales are 80% cash and 20% on credit. All credit sales are collected in the month following the sale. The March 30 balance sheet includes balances of $14,000 in cash, $14,000 in accounts receivable, $11,000 in accounts payable, and a $4,000 balance in loans payable. A minimum cash balance of $14,000 is required. Loans are obtained at the end of any month when a cash shortage occurs. Interest is 1% per month based on the beginning of the month loan balance and is paid at each month-end. If an excess balance of cash exists, loans are repaid at the end of the month. Operating expenses are paid in the month incurred and consist of sales commissions (10% of sales), shipping (4% of sales), office salaries ($5,000 per month) and rent ($7,000 per month).

Prepare a cash budget for each of the months of April, May, and June.

April May June   Budgeted sales $ 30,000 $ 42,000 $ 26,000     Budgeted cash payments for merchandise 24,200 14,800 13,500  

Explanation / Answer

Answer:

2) Calculation of Interest on Borrowings

Interest on Borrowing for April month = Loans payable x 1% = $4000 x 1% = $40

Interest on Borrowings for May Month = Loans Payable as on May 1 x 1% = ($4,000 + $2,360) x 1% = $63.60

3) Repayment of Borrowing including Interest

Surplus Cash in May = $6,920 ($20,920 - $14,000)

Loan Outstanding as on May 31 = $4,000 + $2,360 = $6,360

Interest Payment = $63.60

Total Amount including Interest and Loan Payable = $6,360 + $63.60 = $6,423.60

Castor Inc. Cash Budget for the months of April, May and June Particulars April May June A. Opening Cash Balance $14,000 $14,000 $14,560 Receipts B. Cash Collection from Customer (Note 1) $38,000 $39,600 $29,200 C Total Available Cash before payment / rembursement of expenses (A+B) $52,000 $53,600 $43,760 Payments: Cash Payment for Merchandise $24,200 $14,800 $13,500 Sales Commission (10% of Sales) $3,000 $4,200 $2,600 Shipping Expenses (4% of Sales) $1,200 $1,680 $1,040 Office Salaries $5,000 $5,000 $5,000 Rent $7,000 $7,000 $7,000 D Total Cash Payments / Expenses $40,400 $32,680 $29,140 E Surplus / (Shortage) of Cash after payment of cash expenses (C-D) $11,600 $20,920 $14,620 F Minimum Required Cash Balance $14,000 $14,000 $14,000 G Interest on Borrowing (note 2) $40 $63.60 $0 H Borrowing from Bank (F-E-G) $2,360 $0 $0 I Less: Repayment of Borrowing including interest to Bank (F) (Note 3) $0 ($6,423.60) $0 J Closing Cash Balance (E+G+H-I) $14,000 $14,560.00 $14,620

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