Chai Me, Inc., a merchandiser of herbal tea products, began operations on January 1. The company expects sales in its first month of operations to total $14,000. 80% of the sales are expected to be cash sales. The remaining sales are expected to be on account. Full payment of all sales on account are expected in the month following the month of sale.

Inventory purchases during January are expected to equal $4,000. Purchases are paid for in the month of purchase. No purchase discounts are available.

Chai pays its sales staff a 10% commission on all sales made. The commission expense is recognized in the month of sale and is paid on the 10th of the following month. Chais expected fixed monthly operating expenses are $4,570. Included in this amount is $500 of depreciation expense. All cash operating expenses are paid in the month incurred.

Chai plans to take out a business loan with a local bank at the beginning of January. The entire amount borrowed will be immediately reinvested in the business to purchase assets and inventory. Interest will not begin to accrue until February; however, Chai is required to make a principal payment of $2,000 at the end of January. Additionally, Chai plans to pay a cash dividend of $1,000 to its owners in January.

Chai is required to maintain a minimum cash balance of $3,000 at the end of each month by the bank. How much would Chai need to borrow from an established line of credit in January if it makes no adjustments to the above plan?

A.

$70

B.

$3,370

C.

$2,870

D.

$630

E.

Chai would not need to borrow from an established line of credit.