Madison Corporation's expected beginning cash balance is $35,000. Cash collections are budgeted at $50,000 and cash disbursements are estimated to be $80,000. The minimum required cash balance is $20,000 and the company can borrow as much as needed in increments of $10,000. Calculate the expected ending cash balance for the month.

Question

Multiple choice question.

$20,000

$5,000

$25,000

Answer 1

To calculate the expected ending cash balance for Madison Corporation, we can follow these steps:

1. Calculate the total cash available: \[ \text{Total cash available} = \text{Beginning cash balance} + \text{Cash collections} \] \[ \text{Total cash available} = $35,000 + $50,000 = $85,000 \]

2. Calculate the expected ending cash balance before any borrowing: \[ \text{Expected ending cash balance} = \text{Total cash available} - \text{Cash disbursements} \] \[ \text{Expected ending cash balance} = $85,000 - $80,000 = $5,000 \]

3. Ensure the ending cash balance meets the minimum required cash balance:

   • The minimum required cash balance is $20,000.
   • The expected ending cash balance is $5,000, which is below the required minimum.

4. Calculate how much the company needs to borrow: \[ \text{Amount to borrow} = \text{Minimum required cash balance} - \text{Expected ending cash balance} \] Since \( $20,000 - $5,000 = $15,000 \) is needed, and because borrowing must occur in increments of $10,000, Madison Corporation must borrow $20,000.

5. Calculate the new expected ending cash balance after borrowing: \[ \text{New ending cash balance} = \text{Expected ending cash balance} + \text{Amount borrowed} \] \[ \text{New ending cash balance} = $5,000 + $20,000 = $25,000 \]

Thus, the expected ending cash balance for the month is $25,000.

The answer is $25,000.