Colson Company has a line of credit with Federal Bank. Colson can borrow up to $438,000 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 6.25 percent (3.75 percent + 2.50 percent) annual interest on $79,400 for the month of January. Month January February March April Required. Amount Borrowed or (Repaid) $ 79,400 120, 100 (17,700) 33,400 Prime Rate for the Month 3.75% 2.75 3.25 3.75 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
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Author:Libby
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Chapter1: Financial Statements And Business Decisions
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Exercise 7-11A (Algo) Accounting for a line of credit LO 7-6
Colson Company has a line of credit with Federal Bank. Colson can borrow up to $438,000 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 6.25 percent (3.75 percent + 2.50 percent) annual
interest on $79,400 for the month of January.
Month
January
February
March
April
Amount Borrowed
or (Repaid)
$ 79,400
120, 100
(17,700)
33,400
Prime Rate for
the Month
3.75%
2.75
3.25
3.75
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:Exercise 7-11A (Algo) Accounting for a line of credit LO 7-6 Colson Company has a line of credit with Federal Bank. Colson can borrow up to $438,000 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 6.25 percent (3.75 percent + 2.50 percent) annual interest on $79,400 for the month of January. Month January February March April Amount Borrowed or (Repaid) $ 79,400 120, 100 (17,700) 33,400 Prime Rate for the Month 3.75% 2.75 3.25 3.75 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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