Question

Exercise 7-11 Accounting for a line of credit LO 7-6 Colson Company has a line of credit with Federal Bank. Colson can borrow up to $429,500 at any time over the course of the 2018 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the first four months of 2018. Colson agreed to pay interest at an annual rate equal to 3.00 percent above the bank's prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Colson pays 7.50 percent (4.50 percent +3.00 percent) annual interest on $75,100 for the month of January Month January February March April Amount Borrowed or (Repaid) $ 75, 100 116,800 (24,400) 30,700 Prime Rate for the Month 4.50% 3.50 4.00 4.50

Answer 1

Working note 1:

Calculation of interest paid

Outstanding amount/closing balance

January. 75,100.   

February. 191,900 (75,100+ 116,800)

March. 167,500 (191,900 -24,400)

April. 198,200 (167,500+30,700)

Working note 2:

Calculation of interest rate (Prime rate + 3.00%)

January. 4.5 +3.00 =7.5

February. 3.5+3.00=6.5

March. 4+3.00 = 7

April. 4.5+3 =7.5

a)Interest paid

January. 75,100*7.5/100= 5,633

February. 191,900*6.5/100=12,474

March. 167,500*7/100= 11,725

April. 198,200*7.5/100=14,865

b. amount of colson's liability at the end of each month

(Already calculated in Working note 1)

January. 75,100

February. 191,900

March. 167,500

April. 198,200