Effect of a line of credit on financial statements
Inman Company has a line of credit with Bay Bank. Inman can borrow up to $300,000 at any time over the course of the 2012 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2012. Inman agreed to pay interest at an annual rate equal to 1 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, Inman pays 6 percent (5 percent 1 1 percent) annual interest on $90,000 for the month of January.
Month | Amount Borrowed or (Repaid) | Prime Rate for the Month, % |
January | $90,000 | 5 |
February | 50,000 | 5 |
March | (30,000) | 6 |
April through October | No change | No change |
November | (20,000) | 6 |
December | (30,000) | 5 |
Inman earned $46,000 of cash revenue during 2012.
Required
a.Organize the information in accounts under an accounting equation.
b. Prepare an income statement, balance sheet, and statement of cash flows for 2012.
c. Write a memo discussing the advantages to a business of arranging a line of credit.
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