Case $3$

Purpose: You will apply skills to determine loan borrowings, repayments including interest and analyze

the impact of these calculations to determine if the line of credit is sufficient as well as analyze variances

and make recommendations to management for corrective actions $($if needed$).$

Upon successful completion of this project you will $(1)$ better understand how to determine the financing

section of the cash budget and $(2)$ apply skills to evaluate the line of credit

Task: Work within your team. Review Mr$.$ Puffin$$s Muffins operation. Determine the Financing Section

of the Cash Budget for Months $1,2,$ and $3.$ Evaluate whether the line of credit is sufficient.

Criteria for Deliverable: Individually respond to the questions $($NOT multiple choice$)$ below in the

assignment textbox on Canvas during class time.

$1.$ What is the expected loan balance at the end of Month $1$

$2.$ What is the expected loan balance at the end of Month $2$

$3.$ What is the expected loan balance at the end of Month $3$

$4.$ If interest is paid on the loan, what is the expected amount of the interest and when is it

expected to be paid?

$5.$ Is the line of credit adequate?

Mr$.$ Puffin is currently developing the cash budget for the first three months of operation as well as an

investment in machinery in the $3$rd month. Mr$.$ Puffin needs assistance determining the financing needs.

Specifically, he wants to know how much to borrow or repay, including interest, each month.

The first month$$s beginning cash balance is expected to be $$22,000.$

Each month requires a minimum ending cash balance of $$20,000.$

The expected cash collections from revenues for months $1,2,$ and $3$ are $$50,000,$ $$90,000,$ and $$70,000,$

respectively.

The budgeted operating costs for months $1,2,$ and $3$ are $$60,000,$ $$80,000,$ and $$50,000,$ respectively.

These costs include budgeted depreciation expense for months $1,2,$ and $3$ of $$5,000,$ $$10,000$ and

$$11,000$ respectively.

The third month also includes a $$100,000$ cash outflow for an investment in new machinery.

Mr$.$ Puffin has access to an $$80,000$ line of credit, with $10\%$ annual interest rate.

For budgeting purposes, borrowings occur on the $1$st day of the month and repayments occur as soon

as possible with payment on the last day of the month.

Round interest calculations to nearest whole number.