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

North Woods repaid the $40,000 borrowed in January on March 1. Therefore, the company owes interest on the $60,000 borrowed in February at a rate of (3% + 2%); $60,000 × 5% × 1/12 = $250.

North Woods Company Has a Line of Credit with the Olympia