Detailed Answer
Correct answer: (D)
In this question we will need to determine not only how much money will need to be borrowed in May
(if any), but also how much interest will need to be paid in Mayas well. We will start by looking at the amount
that needs to be borrowed. This is done in much the same manner as the previous question, calculating the
amount of cash paid and received in May. The collections are 50% of April sales ($50,000) and 50% of May
sales ($100,000). This is $75,000 received. The disbursements are 75% of May payables ($40,000) and 25%
of April payables ($40,000). This is $40,000, to which we need to add the $60,000 of payroll and other
disbursements. This is a total of $100,000 in disbursements. This gives a $25,000 shortfall in May that will
need to be made up by borrowing. This would appear to require $30,000 in borrowings. However, at the end
of April the cash balance was not $100,000, but $107,500 as a result of the need to borrow in even $10,000
amounts. Therefore, they do not need to borrow the full $25,000, but only $17,500. This requires a loan of
$20,000. Now we need to look at the interest. Given that they borrowed $100,000 in April, they will need to
pay 1% of this in May, or $1,000.
Note: This question will not appear like this on the Exam because in orderto get the May question correct, as
it is asked, you must have also gotten the April question correct. On the Exam they would give you
information about April for the May question.