Question VII: Budgeting (20 marks) Jackson Chen, president of City One Company, has just approached the company's bank with a request for $50,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories in support of peak sales in the quarter. Since the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months October - December, during which the loan will be used: 1) On October 1, the start of the loan period, the cash balance will be $36,000. Accounts receivable on October 1 will total $151,500, of which $141,000 will be collected during October and $7.200 will be collected during November. The reminder will be uncollectible. 2) Past experience shows that 20% of a month's sales are collected in the month of sale, 70% in the month following sale, and 9% in the second month following sale. The other 1% represents bad debts that are never collected. Budgeted sales and expenses for the period follow: Oct Nov Dec Sales $200,000 $300,000 $250,000 Merchandise purchase 120,000 180,000 150,000 Payroll 9,000 8,000 Lease payments 15,000 15,000 15,000 Advertising 70,000 80,000 60,000 Equipment purchase 8,000 Depreciation 10,000 10,000 10,000 3) Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on September 30, which will be paid during October, total $108,000. 4) In preparing the cash budget, assume that the $50,000 loan will be made in the beginning of October and repaid at the end of December. Annual interest rate on the loan will be 12%. Interest will be paid together with loan payment at the end of December 9,000 Required: a. Prepare a schedule of expected cash collections for October, November and December. (5 marks) b. Prepare a cash budget, by month, for the three-month period. [12 marks] c.If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain. (3 marks]