CASE 6 The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its checking account for transactional purposes. Required: Compute for the effective interest rate assuming: 1. Loan is not discounted. Loan is without compensating balance. 2. Loan is discounted. Loan is without compensating balance. 3. Loan is not discounted. Loan is with compensating balance. 4. Loan is discounted. Loan is with compensating balance. 5. Which of the loan arrangements above is most beneficial to the firm? Justify.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Case 6

CASE 6
The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required
to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would
otherwise maintain only P100,000 in its checking account for transactional purposes.
Required:
Compute for the effective interest rate assuming:
1. Loan is not discounted. Loan is without compensating balance.
2. Loan is discounted. Loan is without compensating balance.
3. Loan is not discounted. Loan is with compensating balance.
4. Loan is discounted. Loan is with compensating balance.
5. Which of the loan arrangements above is most beneficial to the firm? Justify.
Transcribed Image Text:CASE 6 The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its checking account for transactional purposes. Required: Compute for the effective interest rate assuming: 1. Loan is not discounted. Loan is without compensating balance. 2. Loan is discounted. Loan is without compensating balance. 3. Loan is not discounted. Loan is with compensating balance. 4. Loan is discounted. Loan is with compensating balance. 5. Which of the loan arrangements above is most beneficial to the firm? Justify.
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