Explain the accounting treatment on depreciation expense

Reference no: EM131933214

Problem

Organic Food Supply intends to commence trading on 1 June 2013 with a capital of $950,500 cash.

Asia Bank Ltd has agreed perovisionally to finance the business but needs to know its maximum commitment.

The business forecast shows the following estimates:

1) Cash expenditure in June on a shop building $800,000, plant $150,000 and furniture $50,000. These assets are to be written off over 20 years on a straight line basis.

2) Suppliers have agreed to allow one month's credit for purchase of materials.

3) The Sales Budget shows:

June $60,000; July $105,000, August $144,000; September and thereafter $210,000 per month. It is expected that 20% of sales will be for cash and the remainder on terms of two months credit.

The material costs are 66 2/3% of sales

4. Other budgeted cash payments are:

	June	July	Thereafter
Wages	$6,000	$12,000	$20,000
Sundry expenses	$7,000	$15,000	$22,500
Salaries	$3,000	$3,000	$3,000

Required:

a) Prepare a six month Cash Budget ended on 30 November, 2013.

b) Based on your calculation in (a) suggest to the management of the firm the maximum amount of bank loan required assuming the firm doesnot want cash deficit in any month.

c) Suggest 3 other measures that be taken to overcome cash deficit if the bank loan application is rejected.

d) Briefly explain why you think the bank loan application by the company may not be approved.

e) Explain the accounting treatment on depreciation expense in Cash Budget.

Reference no: EM131933214

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