North Woods Company has a line of credit with the Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: $\begin{array}{lrr}
\text { Month}&\text { Amount Borrowed (Repaid)}&\text { Prime Rate for the }\
&&\text { Month}\
\text { January } & \$40,000 & 6\% \
\text { February } &60,000 & 5\% \
\text { March } & (40,000) & 3 \%
\end{array}$ The amount of interest paid at the end of March would be:

Question

North Woods Company has a line of credit with the Olympia State Bank. North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate. Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month. Borrowing is shown as a positive amount, and repayments are shown as negative amounts indicated by parentheses. Activity to date is given as follows: $\begin{array}{lrr}
\text { Month}&\text {  Amount Borrowed (Repaid)}&\text {  Prime Rate for the }\
&&\text { Month}\
\text { January } & \$40,000 & 6\% \
\text { February } &60,000 & 5\% \
\text { March } & (40,000) & 3 \%
\end{array}$ The amount of interest paid at the end of March would be:

Quizplus · Accepted Answer

The interest for March is calculated on the remaining balance after the repayment in March. The balance at the end of February is $100,000 ($40,000 + $60,000). After repaying $40,000 in March, the balance is $60,000. The interest rate for March is 5% (3% prime rate + 2%). The monthly interest is $60,000 * (5%/12) = $250.

North Woods Company Has a Line of Credit with the Olympia