Question

Western Company is preparing a cash budget for June. The company has $10,000 in cash at the beginning of June and anticipates $32,000 in cash receipts and $38,500 in cash payments during June. Western Company has an agreement with its bank to maintain a minimum cash balance of $10,000. As of May 31, the company has no loans outstanding. To maintain the $10,000 required balance, during June the company must:

Multiple Choice
a.Borrow $10,000.
b.Repay $6,500.
c.Borrow $6,500.
d.Borrow $6,800.
e.Repay $3,500.

Answer 1

Western Company must borrow $6,500 to maintain the required minimum cash balance of $10,000 at the end of June after accounting for their cash receipts and payments. The correct answer is option c.

Step-by-step explanation:

Western Company is preparing a cash budget for June and needs to maintain a minimum cash balance of $10,000. The beginning cash balance is $10,000, with anticipated cash receipts of $32,000. However, they expect cash payments of $38,500, creating a potential shortfall.

Calculating the end-of-June cash position, we subtract the cash payments from the sum of beginning cash and receipts ($10,000 + $32,000 - $38,500), resulting in a balance of $3,500. To maintain the minimum required balance, Western Company must borrow additional funds.

The amount to be borrowed is the difference between the expected end-of-June balance and the minimum required balance ($10,000 - $3,500), which is $6,500. Therefore, the correct option is c. Borrow $6,500.