Gce Model Questions Vol1 2020 Financial Accounting Question 45

A local authority prepares its cash budget for the next year. Expected cash receipts are: Council tax £2,500,000; Government grant £1,200,000 (the grant condition requires that at least 40 % of the grant be spent on social services); Other revenues £300,000. Expected cash payments are: Salaries £1,800,000; Social services £450,000; Maintenance £400,000; Debt repayment £200,000. The authority will set aside a contingency reserve equal to 5 % of total cash receipts, which will be transferred to a reserve fund and not used for payments. Determine whether the authority can satisfy the grant condition after accounting for the contingency reserve, and if not, calculate the minimum additional cash that must be reallocated from the maintenance budget to social services to meet the condition.