Elisabeth Peterson, owner of Lisa Retail Co$,$ is negotiating with the bank for a $400,000$ loan for the second quarter of the current year.

If the bank grants the loan, Elisabeth will receive the whole amount of $400,000$ on her bank account on April $1.$ However, she will have to pay interest charges in the end of every month, i$.$e$.,$ in April, May and June. The annual interest rate will be $18$ percent.

Elisabeth intends to use the proceeds on April $1$ as follows: pay accounts payable of $300,000$; purchase equipment for $98,000$; and add the rest to bank balance. The current account position of Lisa Retail Co$,$ according to financial statements as of March $31,$ is as follows.

Cash in bank

Merchandise inventory

Accounts payable $($including accrued operating expenses$)$

$60,000180,000300,000$

The bank loan officer asks Elisabeth to prepare a forecast of her cash receipts and cash payments for the next three months to demonstrate that the loan can be

repaid at the end of June.

Elisabeth has made the following estimates for sales, which are to be used in preparing the second quarter cash budget:

April $510,000$

May $570,000$

June $540,000$

July $400,000$

All sales are on account. Due to strict credit policies, the company has no bad debt expense. The following collection performance is anticipated this year: Percent collected in month of sale $50\%$

Percent collected in month following sale $30\%$

Percent collected in the second month following sale $20\%$

Cost of goods sold consistently has averaged about $64$ percent of sales. Operating expenses are budgeted at $84,000$ per month plus $12$ percent of sales. With the exception of $8,800$ per month depreciation expense, all operating expenses and purchases are on account and are paid in the month following their incurrence.

Sales in February and March were $420,000$ and $460,000,$ respectively.

Merchandise inventory at the end of each month should be sufficient to cover the following month$$s sales. Instructions:

a$.$ Elisabeth Peterson has contacted you to prepare a cash budget showing estimated cash receipts and cash payments for April, May and June. First, you must prepare the following schedules:

$1.$ Estimated cash collections on receivables.

$2.$ Estimated merchandise purchases.

$3.$ Estimated cash payments for operating expenses.

$4.$ Estimated cash payments on accounts payable $($including operating expenses$).$

b$.$ Once the schedules have been prepared, complete the cash budgets for April, May and June showing the cash balance at the end of each month.

c$.$ On the basis of this cash forecast, write a report to Elisabeth explaining whether she will be able to repay the $400,000$ bank loan at the end of June.