Question

1. Colson Company has a line of credit with Federal Bank. Colson can borrow up to $423,500 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 2.50 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 6.75 percent (4.25 percent + 2.50 percent) annual interest on $82,000 for the month of January.

Month	Amount Borrowed or (Repaid)			Prime Rate for the Month
January	$	82,000			4.25	%
February		119,700			3.25
March		(22,300)			3.75
April		31,200			4.25

Required

a. Compute the amount of interest that Colson will pay on the line of credit for the first four months of 2018. (Round answers to nearest whole dollar.)

b. Compute the amount of Colson's liability at the end of each of the first four months. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar.)

Answer 1

Month	Beginning Balance	Borrowed (Repaid)	Ending Balance (b)	Interest Rate (Prime rate + 2.50%)	Interest Expense (a)
January	0	82000	82000	6.75%	461
February	82000	119700	201700	5.75%	966
March	201700	-22300	179400	6.25%	934
April	179400	31200	210600	6.75%	1185

Interest Expense = (Ending Balance x Interest Rate)/12