Question

Western Company is preparing a cash budget for June. The company has $11,000 cash at the beginning of June and anticipates $31,000 in cash receipts and $36,500 in cash disbursements 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 owes $15,000 to the bank. To maintain the $10,000 required balance, during June the company must:

Borrow $10,000.
Borrow $4,500.
Repay $5,500.
Repay $4,500.
Borrow $5,500.

Answer 1

Borrow $19,500

Step-by-step explanation:

The movement in the cash balance between the beginning an end of a period may be expressed as

opening balance + cash collection - cash disbursed = closing balance

As such, where the company has $11,000 cash at the beginning of June and anticipates $31,000 in cash receipts and $36,500 in cash disbursements during June, the expected closing balance

= $11,000 + $31,000 - $36,500

= $5,500

If the company is owing the bank $15,000 then the company would still owe

= $5,500 - $15,000

= ($9,500)

If the company is expected to maintain a balance of $10,000, the amount to be borrowed must be $10000 in excess of the amount owed the bank. Hence amount to be borrowed

= $10000 + $9500

= $19,500