Question

Cash receipts $40,000Beginning cash balance $10,000Cash Payments $48,000Desired ending cash balance $7,000If there is a cash shortage, the company borrows money from the bank. All cash is borrowed at the beginning of the month in $1,000 increments. Interest is paid monthly on the first day of the following month. The interest rate is 1% per month. The company had no debt before January 1st. What is the amount of interest paid in February? Please show all work and explanation

Answer 1

$50

Step-by-step explanation:

For computing the interest amount, first we have to determine the how much cash is available and how much funding is required which is shown below:

The cash available would be

= Beginning cash balance + expected cash receipts - expected cash disbursements

= $10,000 + $40,000 - $48,000

= $2,000

Now the funding amount would be

= Ending cash balance - cash available

= $7,000 - $2,000

= $5,000

So, the interest would be

= $5,000 × 1%

= $50