Ling Supply, a family-owned durable medical equipment store, began January with $10,200 cash. Management forecasts that collections from credit customers will be $11,700 in January and $15,000 in February. The store is scheduled to receive $7,000 cash on a business note receivable in January.
Projected cash payments include inventory purchases ($14,500 in January and $13,900 in February) and selling and administrative expenses ($2,900 each month). Ling Supply’s bank requires a $10,000 minimum balance in the store’s checking account. At the end of any month when the account balance falls below $10,000, the bank automatically extends credit to the store in multiples of $1,000. Ling Supply borrows as little as possible and pays back loans in quarterly installments of $2,500, plus 5% APR interest on the entire unpaid principal. The first payment occurs three months after the loan.
1. Prepare Ling Supply’s cash budget for January and February.
2. How much cash will Ling Supply borrow in February if collections from customers that month total $14,000 instead of $15,000?
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