A company is negotiating with the bank for a $200,000/ 90 day/12% loan effective

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A company is negotiating with the bank for a $200,000/ 90 day/12% loan effective July 1 of the current year. If the bankgrants the loan, the proceeds will be $194,000 which the companyintends to use on July 1 as follows: pay accounts payable$150,000; purchase equipment $160,000; add to bank balance$28,000.
the current working capital position, according to financialstatements as of June 30 as follows:
cash inbank.......................................................................$20,000
receivables(net of allowance for doubtfullaccounts............ 160,000
merchandiseinvnetory.......................................................  90,000
total currentassets............................................................$270,000
accounts payable(includes accrued operatingexpense)......   150,000
workingcapital.................................................................$120,000
These estimates have been made, which are to be used in a 3month cash budget:
sales(all accounts) for July $300,000, August $360,000 Sept$270,000 Oct $200,000
Past experience shows that 80% of the receivables, in anymonth will be collected in the month following the sale. 19%will be collected in the second month following the sale and the 1%will prove uncollectible. They expect to collect $120,00 ofthe June30 receivables in July and the remaining $40,000 inAugust.
Cost of goods sold has averaged about 65% of sales. Operating expenses are budgeted at $36,000 per month plus 8% ofsales. With the exception of $4,400 per monthdepreciation expense, all operating expenses and purchases are inaccount and paid in the month following their occurance. **on the basis of the cash forecast, write a brief reportexplaining whether the compnay will be able to repay the $200,000bank loan at the end of September. A company is negotiating with the bank for a $200,000/ 90 day/12% loan effective July 1 of the current year. If the bankgrants the loan, the proceeds will be $194,000 which the companyintends to use on July 1 as follows: pay accounts payable$150,000; purchase equipment $160,000; add to bank balance$28,000. the current working capital position, according to financialstatements as of June 30 as follows: cash inbank.......................................................................$20,000 receivables(net of allowance for doubtfullaccounts............ 160,000 merchandiseinvnetory.......................................................  90,000 total currentassets............................................................$270,000 accounts payable(includes accrued operatingexpense)......   150,000
workingcapital.................................................................$120,000
These estimates have been made, which are to be used in a 3month cash budget:
sales(all accounts) for July $300,000, August $360,000 Sept$270,000 Oct $200,000
Past experience shows that 80% of the receivables, in anymonth will be collected in the month following the sale. 19%will be collected in the second month following the sale and the 1%will prove uncollectible. They expect to collect $120,00 ofthe June30 receivables in July and the remaining $40,000 inAugust.
Cost of goods sold has averaged about 65% of sales. Operating expenses are budgeted at $36,000 per month plus 8% ofsales. With the exception of $4,400 per monthdepreciation expense, all operating expenses and purchases are inaccount and paid in the month following their occurance. **on the basis of the cash forecast, write a brief reportexplaining whether the compnay will be able to repay the $200,000bank loan at the end of September. workingcapital.................................................................$120,000 These estimates have been made, which are to be used in a 3month cash budget: sales(all accounts) for July $300,000, August $360,000 Sept$270,000 Oct $200,000 Past experience shows that 80% of the receivables, in anymonth will be collected in the month following the sale. 19%will be collected in the second month following the sale and the 1%will prove uncollectible. They expect to collect $120,00 ofthe June30 receivables in July and the remaining $40,000 inAugust. Cost of goods sold has averaged about 65% of sales. Operating expenses are budgeted at $36,000 per month plus 8% ofsales. With the exception of $4,400 per monthdepreciation expense, all operating expenses and purchases are inaccount and paid in the month following their occurance. **on the basis of the cash forecast, write a brief reportexplaining whether the compnay will be able to repay the $200,000bank loan at the end of September.

Explanation / Answer

Reports regarding repayment of bank loan ============================= The cash budget for the month of July (the month in whichloans were expected to receive) after inclusion of expected bankloan of $194,000 doesn't leave required minimum bank balance of$28,000. To maintain this balance, accounts payable has beendeferred and instead of estimated payment of $150,000, only$122,000 has been paid and the balance $28,000 has been paid inaugust alongwith August total payment to the tune of$250,600. As such the month of August results in $5,400 as closing cashbalance after providing interest on loan $24,000. InSeptember, closing cash balance is $32,000 after providing intereston loan $24,000. It is evident from the projected cash forecast forthe month of July, August and September that company doesn't havesufficient cash to repay the borrowed loan from bank.

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