Question

Preparing a financial budget—cash budget

You recently began a job as an accounting intern at Reilly Golf Park. Your first task was to help prepare the cash budget for April and May. Unfortunately, the computer with the budget file crashed, and you did not have a backup or even a paper copy. You ran a program to salvage bits of data from the budget file. After entering the following data in the budget, you may have just enough information to reconstruct the budget.

Reilly Golf Park eliminates any cash deficiency by borrowing the exact amount needed from First Street Bank, where the current interest rate is 6% per year. Reilly Golf Park first pays interest on its outstanding debt at the end of each month. The company then repays all borrowed amounts at the end of the month with any excess cash above the minimum required but after paying monthly interest expenses. Reilly does not have any outstanding debt on April 1.

Complete the cash budget. Round interest expense to the nearest whole dollar.

Short answer

Total Interest expense in the month of May is $44.

Step-by-step solution

Preparation of schedule of cash budget 

REILLY GOLF PARK Cash Budget Two months ended 31 May
	April	May
Beginning cash balance	$16,700	$25,000
Cash receipts	$98,000	$79,900
Cash from sale of plant assets	$0	$2,200
Cash available	$114,700	$107,100
LESS: Payments:
Inventory purchase	$51,000	$43,000
Selling and administrative expenses	$47,400	$36,856
Interest expense	$0	$44
Total cash payments	$98,400	$79,900
Ending cash balance before financing	$16,300	$27,200
Minimum cash balance desired	($25,000)	($25,000)
Cash excess (deficiency)	($8,700)	$2,200
Financing:
Borrowing	$8,700	$0
Principal repayments	$0	$2,200
Ending cash balance	$25,000	$25,000

Calculation of interest expense for May

Interest expense = cashx rate x Time

= $8,700 x 6% x 1/12

= $44