Unit 15 CMCC Help (Kaplan)

mi|kshake

Hi,

Got a query on activity 5 of chapter 1. It's quite basic, but something I should figure out now incase it comes up in an exam.

The answer shows that there is no interest on the overdraft in the cash budget you prepare.

The question gives me the following information:

• An overdraft of £0.5million has been agreed with Wilson Limited's bankers.
  
• The current overdraft interest rate is 7.25% per annum on the prior month closing balance.

To me, it's not clear from this information that there will not be any overdraft interest. (I had entered interest for every month in the cash budget).

Hope that this is enough information to understand what I mean.

Any help is appreciated! Don't want to start this unit doing the wrong thing!

mi|kshake~

SandyHood

If overdraft interest is charged monthly then it should appear on the cash budget.
Typical AAT questions simplify the calculation to a % of the closing balance in the previous month.
But make sure that you recognise the annual rate has to be divided by 12
Month............... Aug...........Sept.........Oct
Op bal............-100000.......-120000....-140000
Cl bal.............-120000.......-140000......-80000

So the interest payable would be
Month............... Aug...........Sept.........Oct
.......................-725......... -846......... -483
using 7.25% divided by 12 x the closing balance

The only time when interest would not appear on the cash budget would be where it is stored up and charged at the end of the year.