showing the cash expected to be available to pay the claims of the general creditors 565836

(Cash budget) Andrews Manufacturing has incurred substantial losses for several years and has decided to declare bankruptcy. The company petitioned the court for protection from creditors on March 31, 1999, and submitted the following

balance sheet:

ANDREWS MANUFACTURING

Balance Sheet

March 31, 1999

The liabilities and stockholders’ equity of Andrews at this date are

Andrews’ management informed the court that the company has developed a new product and that a prospective customer is willing to sign a contract for the purchase of 10,000 units of this product during the year ending March 31, 2000, 12,000 units during the year ending March 31, 2001, and 15,000 units during the year ending March 31, 2002, at a price of $90 per unit. This product can be manufactured using Andrews’ present facilities. Monthly production with immediate delivery is expected to be uniform within each year. Receivables are expected to be collected during the calendar month following g sales. Unit production costs of the new product are estimated as follows:

Fixed costs of $130,000 (excluding depreciation) are estimated per year. Purchases of direct material will be paid during the calendar month following purchase. Fixed costs, direct labor, and variable overhead will be paid as incurred. Inventory of direct material will be equal to 60 days’ usage. After the first month of operations, 30 days’ usage will be ordered each month The general creditors have agreed to reduce their total claims to 60% of their March 31, 1999, balances under the following conditions:

• Existing accounts receivable and inventories are to be liquidated immediately, with the proceeds turned over to the general creditors.

• The reduced balance of accounts payable is to be paid as cash is generated from future operations, but no later than March 31, 2001. No interest will be paid on these obligations. Under this proposed plan, the general creditors would receive $110,000 more than the current liquidation value of Andrews’ assets. The court has engaged you to determine the feasibility of this plan. Ignoring any need to borrow and repay short term funds for working capital purposes, prepare a cash budget for the years ending March 31, 2000 and 2001, showing the cash expected to be available to pay the claims of the general creditors, payments to general creditors, and the cash remaining after payment of claims. (CPA adapted)