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2. Patterson Co. values, advertises and sells residential property on behalf of the customers. The co. has been in business for only a short time and is preparing a cash budget for the first four months of 2016. Expected sales of residential properties are as follows: 2016 Year Month Unit Sold 2015 December 10 January 10 2016 February 15 2016 Page 8 of 10 March 25 2016 April 30 The average price of each property is $180,000 and Patterson Co. charges a fee of 3% of the value of each property sold. Patterson Co. receives 1% in the month of sales and the remaining 2% in the month after sales. The Company has nine employees who are paid on a monthly basis. The average salary per employees is $35,000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of $140 for each additional property sold. Variable expenses are incurred at the rate of 0.5% of the value of each property sold and these expenses are paid in the month of sales. Fixed overheads of $4,300 per month are paid in the month in which they arise. Patterson pays interest every three months on a loan of $200,000 at a rate of 6% per year. The last interest payment in each year is paid in December. An outstanding tax liability of $95,800 is due to be paid in April. In the same month Patterson Co. intends to dispose of surplus vehicles, with a net book value of $15,000, for $20,000. The cash balance at the start of January 2016 is expected to be a deficit of $40,000. Required: a) Prepare a monthly cash budget for the period from January to April 2016. Your budget must clearly indicate each item of income and expenditure, and the opening and closing cash balances. (14 Marks) b) Explain how the Baumol Model can be employed to reduce the costs of cash management and discuss whether the Baumol cash management model may be of assistance to James Co for this purpose. (6 Marks)

2. Patterson Co. values, advertises and sells residential property on behalf of the customers. The co. has been in business for only a short time and is preparing a cash budget for the first four months of 2016. Expected sales of residential properties are as follows: 2016 Year Month Unit Sold 2015 December 10 January 10 2016 February 15 2016 Page 8 of 10 March 25 2016 April 30 The average price of each property is $180,000 and Patterson Co. charges a fee of 3% of the value of each property sold. Patterson Co. receives 1% in the month of sales and the remaining 2% in the month after sales. The Company has nine employees who are paid on a monthly basis. The average salary per employees is $35,000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of $140 for each additional property sold. Variable expenses are incurred at the rate of 0.5% of the value of each property sold and these expenses are paid in the month of sales. Fixed overheads of $4,300 per month are paid in the month in which they arise. Patterson pays interest every three months on a loan of $200,000 at a rate of 6% per year. The last interest payment in each year is paid in December. An outstanding tax liability of $95,800 is due to be paid in April. In the same month Patterson Co. intends to dispose of surplus vehicles, with a net book value of $15,000, for $20,000. The cash balance at the start of January 2016 is expected to be a deficit of $40,000. Required: a) Prepare a monthly cash budget for the period from January to April 2016. Your budget must clearly indicate each item of income and expenditure, and the opening and closing cash balances. (14 Marks) b) Explain how the Baumol Model can be employed to reduce the costs of cash management and discuss whether the Baumol cash management model may be of assistance to James Co for this purpose. (6 Marks)

Principles of Accounting Volume 2
Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter7: Budgeting
Section: Chapter Questions
Problem 11EB: Gear Up Co. pays 65% of its purchases in the month of purchase, 30% in the month after the purchase,...
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2. Patterson Co. values, advertises and sells residential property on behalf of the customers. The co. has been in business for only a short time and is preparing a cash budget for the first four months of 2016. Expected sales of residential properties are as follows: 2016 Year Month Unit Sold 2015 December 10 January 10 2016 February 15 2016 Page 8 of 10 March 25 2016 April 30 The average price of each property is $180,000 and Patterson Co. charges a fee of 3% of the value of each property sold. Patterson Co. receives 1% in the month of sales and the remaining 2% in the month after sales. The Company has nine employees who are paid on a monthly basis. The average salary per employees is $35,000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of $140 for each additional property sold. Variable expenses are incurred at the rate of 0.5% of the value of each property sold and these expenses are paid in the month of sales. Fixed overheads of $4,300 per month are paid in the month in which they arise. Patterson pays interest every three months on a loan of $200,000 at a rate of 6% per year. The last interest payment in each year is paid in December. An outstanding tax liability of $95,800 is due to be paid in April. In the same month Patterson Co. intends to dispose of surplus vehicles, with a net book value of $15,000, for $20,000. The cash balance at the start of January 2016 is expected to be a deficit of $40,000. Required: a) Prepare a monthly cash budget for the period from January to April 2016. Your budget must clearly indicate each item of income and expenditure, and the opening and closing cash balances. (14 Marks) b) Explain how the Baumol Model can be employed to reduce the costs of cash management and discuss whether the Baumol cash management model may be of assistance to James Co for this purpose. (6 Marks)
Transcribed Image Text:2. Patterson Co. values, advertises and sells residential property on behalf of the customers. The co. has been in business for only a short time and is preparing a cash budget for the first four months of 2016. Expected sales of residential properties are as follows: 2016 Year Month Unit Sold 2015 December 10 January 10 2016 February 15 2016 Page 8 of 10 March 25 2016 April 30 The average price of each property is $180,000 and Patterson Co. charges a fee of 3% of the value of each property sold. Patterson Co. receives 1% in the month of sales and the remaining 2% in the month after sales. The Company has nine employees who are paid on a monthly basis. The average salary per employees is $35,000 per year. If more than 20 properties are sold in a given month, each employee is paid in that month a bonus of $140 for each additional property sold. Variable expenses are incurred at the rate of 0.5% of the value of each property sold and these expenses are paid in the month of sales. Fixed overheads of $4,300 per month are paid in the month in which they arise. Patterson pays interest every three months on a loan of $200,000 at a rate of 6% per year. The last interest payment in each year is paid in December. An outstanding tax liability of $95,800 is due to be paid in April. In the same month Patterson Co. intends to dispose of surplus vehicles, with a net book value of $15,000, for $20,000. The cash balance at the start of January 2016 is expected to be a deficit of $40,000. Required: a) Prepare a monthly cash budget for the period from January to April 2016. Your budget must clearly indicate each item of income and expenditure, and the opening and closing cash balances. (14 Marks) b) Explain how the Baumol Model can be employed to reduce the costs of cash management and discuss whether the Baumol cash management model may be of assistance to James Co for this purpose. (6 Marks)
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