A. 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.

B. First, we need to determine what the interest is that has to be paid in May because interest is paid monthly. To do this we need to determine if there were any borrowings made 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 AP and 25% of March AP (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 cash flow for the month. We assume that beginning cash was $100,000 and ending cash also needed to be $100,000. Therefore, the cash deficit for the month was the same as the cash flow: ($92,500).

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 $100,000 in cash. Thus, we need to pay $1,000 of interest on May 1 ($100,000 × (12% ÷ 12)). Note that we have a small cash surplus of $7,500 at the beginning of May since we borrowed more than needed to cover deficit ($100,000 - $92,500). The beginning cash balance is therefore $100,000 + $7,500, or $107,500.

Now we need to determine cash inflows and outflows in 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). However, adding to this ($25,000) to the cash surplus from the beginning of the month we will get a deficit of for the month of only $18,500. 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 of May and end the month with at least $100,000 in cash.

C. 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.

D. 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.