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:
The amount of interest paid at the end of March would be:
A)$150.
B)$300.
C)$267.
D)$250.

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:
The amount of interest paid at the end of March would be: 
A)$150. 
B)$300. 
C)$267. 
D)$250.

Quizplus · Accepted Answer

To calculate the interest paid, we need to first calculate the average balance for the month of March.

Starting balance on March 1st = $20,000 
Borrowed on March 15th = $10,000 
Repaid on March 20th = ($5,000)

Average balance for March = (20,000 + 10,000 - 5,000) / 2 = $12,500

Next, we need to calculate the interest rate based on the bank's prime rate. If the prime rate is 4%, then the annual interest rate charged to North Woods is 6% (4% + 2%).

Monthly interest = average balance * monthly interest rate 
Monthly interest rate = annual interest rate / 12

Monthly interest = $12,500 * (6%/12) = $62.50

Finally, we need to calculate the total interest paid for the month of March.

Total interest paid = monthly interest * number of months 
Total interest paid = $62.50 * 4 = $250

Therefore, the answer is D) $250.

North Woods Company Has a Line of Credit with the Olympia