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Colson Company has a line of credit with Federal Bank. Colson can borrow up to $316,000 at any time over the course of the 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 the year. 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 5.75 percent (3.25 percent + 2.50 percent) annual interest on $78,400 for the month of January. Month January February March April Amount Borrowed or (Repaid) $ 78,400 119,600 (17,700) 34,400 Prime Rate for the Month 3.25% 2.25 2.75 3.25 Required a. Compute the amount of interest that Colson will pay on the line of credit for the first four months of the year. b. Compute the amount of Colson's liability at the end of each of the first four months.

Colson Company has a line of credit with Federal Bank. Colson can borrow up to $316,000 at any time over the course of the 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 the year. 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 5.75 percent (3.25 percent + 2.50 percent) annual interest on $78,400 for the month of January. Month January February March April Amount Borrowed or (Repaid) $ 78,400 119,600 (17,700) 34,400 Prime Rate for the Month 3.25% 2.25 2.75 3.25 Required a. Compute the amount of interest that Colson will pay on the line of credit for the first four months of the year. b. Compute the amount of Colson's liability at the end of each of the first four months.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Colson Company has a line of credit with Federal Bank. Colson can borrow up to $316,000 at any time over the course of the 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 the year. 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 5.75 percent (3.25 percent + 2.50 percent) annual interest on $78,400 for the month of January. Month January February March April the Month Amount Borrowed Prime Rate for or (Repaid) $ 78,400 119,600 (17,700) 34,400 3.25% 2.25 2.75 3.25 Required a. Compute the amount of interest that Colson will pay on the line of credit for the first four months of the year. b. Compute the amount of Colson's liability at the end of each of the first four months.
Transcribed Image Text:Colson Company has a line of credit with Federal Bank. Colson can borrow up to $316,000 at any time over the course of the 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 the year. 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 5.75 percent (3.25 percent + 2.50 percent) annual interest on $78,400 for the month of January. Month January February March April the Month Amount Borrowed Prime Rate for or (Repaid) $ 78,400 119,600 (17,700) 34,400 3.25% 2.25 2.75 3.25 Required a. Compute the amount of interest that Colson will pay on the line of credit for the first four months of the year. b. Compute the amount of Colson's liability at the end of each of the first four months.
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