Randwick Medical Centre provides a wide range of hospital services. The hospital's board of directors has recently

Question:

Randwick Medical Centre provides a wide range of hospital services. The hospital's board of directors has recently authorised the following capital expenditure:

Neonatal care equipment .......................................... $900 000

CT scanner ............................................................ 800 000

X-ray equipment ..................................................... 650 000

Laboratory equipment............................................. 1 450 000

Total ............................................................... $3 800 000

The expenditure are planned for 1 October, and the board wished to know the amount of borrowing, if any, necessary on that date. Marc Kelly, the management accountant, has gathered the following information to be used in preparing an analysis of future cash flows:

• Actual billings for the first six months of this year, made in the month of service, are as follows:

Month ______________________________ Actual amount

January ............................................... $4 400 000

February ............................................... 4 400 000

March .................................................. 4 500 000

April ................................................... 4 500 000

May ................................................... 5 000 000

June ................................................... 5 000 000

• Ninety per cent of the hospital's billings are made to health funds such as Medicare and private health insurance companies. The remaining 10 per cent of billings are made directly to patients. Historical patterns of billing receipts are presented as follows:

__________________________ Heath fund billings (%) ______ Direct patient billings (%)

During month of service ...................... 20 ........................................ 10

During month following service ............. 50 ........................................ 40

During second month following service .... 20 ........................................ 40

Uncollectable ................................... 10 ....................................... 10

• Estimated billings for the last six months of this year are listed below. The same billing and collection patterns that have been experienced during the first six months of this year are expected to continue during the last six months of the year.

Month ______________________________ Estimated amount

July ..................................................... $4 500 000

August .................................................. 5 000 000

September .............................................. 5 000 000

October ................................................. 5 700 000

November .............................................. 5 800 000

December .............................................. 5 800 000

• The actual purchase of the past three months and the planned purchased for the last six months of this year are presented in the following schedule:

Month __________________________________________ Amount

April ............................................................... $1 100 000

May.................................................................. 1 200 000

June ..................................................................1 200 000

July .................................................................. 1 250 000

August .............................................................. 1 500 000

September ........................................................... 1 850 000

October .............................................................. 1 950 000

November ........................................................... 2 250 000

December ........................................................... 1 750 000

Additional information:

• All purchases are on credit, and accounts payable are paid in the month following the purchase.

• Salaries for each month during the remainder of the year are expected to be $1500 000 per month plus 20 per cent of that month's billings. Salaries are paid in the month of service.

• The hospital's monthly depreciation charges are $125 000.

• The Medical Centre incurs interest expense of $150 000 per month and makes interest payments of $450 00o on the last day of each quarter (31 March, 30 June, 30 September and 31 December).

• Investment income is expected to continue at the rate of $175 000 per month.

• The hospital has a cash balance of $300 000 on 1 July, and has a policy of maintaining a minimum end-of-month cash balance of to per cent of the current month's purchases.

• The hospital uses a calendar year reporting period.

Required:

1. Prepare a cash budget for the third quarter of the year (July to September) that includes:

(a) Budgeted cash receipts by month.

(b) Budgeted cash payments by month.

2. Determine the amount of borrowing, if any, necessary on 1 October in order to acquire the capital expenditure items totalling $3 800 000?

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