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Interest was $1,000, not $900. Additional borrowings are needed as there is a cash deficit in May. See the correct answer for a complete explanation.
Principal repayments are to be made in any month in which there is a surplus of cash. There was no cash surplus in May so no principal would be repaid. See the correct answer for a complete explanation.
First, we need to determine the beginning cash balance for May and the amount of interest that has to be paid in May for April borrowings, since interest is paid monthly. To do this we need to determine if there were any borrowings in April. To determine what the April borrowings were, we need to first determine the cash collections for April: 50% of April sales and 50% of March sales (or $25,000 + $20,000 = $45,000) will be collected in April. Then, we need to determine the amount paid for accounts payable in April: 75% of April A/P and 25% of March A/P (or $30,000 + $7,500 = $37,500) will be paid in April. Other disbursements are paid in the month they occur, and for April they are: $70,000 for payroll plus $30,000 for other disbursements, totaling $100,000. Subtracting the amount of cash outflows from cash inflows we get a $92,500 negative net cash flow for the month. We assume that April's beginning cash was $100,000. Therefore, the company's April ending cash balance before any borrowings was $100,000 ? $92,500, or $7,500. The company needed to have $100,000 in cash at the end of April. Since borrowings for cash deficits must be made in $10,000 increments, the company needed to borrow $100,000 to cover the $92,500 cash deficit so it could end the month with at least $100,000 in cash. After borrowing $100,000, the April ending cash balance was $107,500; but the extra $7,500 in the cash account is unavoidable because of the $10,000 incremental borrowing requirement. The company will need to pay $1,000 of interest on May 31 ($100,000 × [12% ÷ 12]) for the April borrowing. Next, we need to determine the cash inflows and outflows for May as we did for April. Cash collections in May are 50% of the April and May sales (50% × $50,000) + (50% × $100,000) = $75,000. Accounts payable that will be paid in May are 75% of May's AP and 25% of April's AP: ($40,000 × 75%) + ($40,000 × 25%) = $40,000. Other disbursements total $61,000 ($50,000 for payroll + $10,000 in other disbursements + $1,000 in interest for borrowings during April). Subtracting the total disbursements from the collections in May we get a $26,000 negative cash flow ($75,000 ? $40,000 ? $61,000). At the beginning of the month, the company had a cash balance of $107,500. $107,500 minus the $26,000 negative net cash flow during May will result in a May ending cash balance before any borrowing of $81,500. But remember the company needs to end the month with a cash balance of $100,000. They are $18,500 short. Since borrowings for cash deficits must be made in $10,000 increments, the company needs to borrow $20,000 to cover the $18,500 cash deficit for May and end the month with at least $100,000 in cash. In fact, they will end the month of May with $101,500 in cash. ($107,500 + $75,000 - $40,000 - $61,000 + $20,000 = $101,500).
Principal repayments are to be made in any month in which there is a surplus of cash. There was no cash surplus in May so no principal would be repaid. Also the interest is not $100. See the correct answer for a complete explanation.