Cash budget; challenging) Freeman Manufacturing has incurred substantial losses for several years and has decided to declare bankruptcy. The com¬ pany petitioned the court for protection from creditors on March 31, 2006, and submitted the following balance sheet:

Freeman’s management informed the court that the company has developed a new product and that a prospective customer is willing to sign a contract for the purchase of 10,000 units of this product during the year ending March 31, 2007, 12,000 units during the year ending March 31, 2008, and 15,000 units during the year ending March 31, 2009, at a price of $90 per unit. This product can be manufactured using Freeman’s present facilities. Monthly production with immediate delivery is expected to be uniform within each year. Receivables are expected to be collected during the calen¬ dar month following sales. Unit production costs of the new product are es¬ timated as follows:

Fixed costs of $130,000 (excluding depreciation) are estimated per year. Pur¬ chases of direct material will be paid during the calendar month following purchase. Fixed costs, direct labor, and variable overhead will be paid as in¬ curred. Inventory of direct material will equal 60 days’ usage. After the first month of operations, 30 days’ usage will be ordered each month.
The general creditors have agreed to reduce their total claims to 60 per¬ cent of their March 31, 2006, balances under the following conditions:
• Existing accounts receivable and inventories are to be liquidated imme¬ diately, with the proceeds turned over to the general creditors.

• The reduced balance of accounts payable is to be paid as cash is gener¬ ated from future operations but no later than March 31, 2008. No inter¬ est will be paid on these obligations.
Under this proposed plan, the general creditors would receive $110,000 more than the current liquidation value of Freeman’s assets. The court has engaged you to determine the feasibility of this plan.
Ignoring any need to borrow and repay short-term funds for working capital purposes, prepare a cash budget for the years ending March 31, 2007 and 2008, showing the cash expected to be available to pay the claims of the general creditors, payments to general creditors, and the cash remaining after payment of claims.
(CPA adapted)

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Assets Accounts Receivable Inventories Plant Assets (net) Totals FREEMAN MANUFACTURING Balance Sheet March 31, 2006 Book Value Liquidation Value $100,000 $ 50,000 90,000 40,000 150,000 160,000 $340,000 $250,000 Freeman's liabilities and stockholders' equity at this date follow: Accounts Payable-General Creditors Common Stock Retained Earnings Deficit $600,000 60,000 (320,000) Total $340,000