Barrett Company obtained a $80,000 line of credit from the Garden State Bank on January 1, 2014. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2014 are shown in the following table. Assume that Barrett borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. The amount of interest expense recognized in March, rounded to the nearest dollar, would be

Question

Barrett Company obtained a $80,000 line of credit from the Garden State Bank on January 1, 2014. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2014 are shown in the following table. Assume that Barrett borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses.  The amount of interest expense recognized in March, rounded to the nearest dollar, would be

Quizplus · Accepted Answer

To calculate the interest expense for March, we need to first determine the average balance of the line of credit for the month.

On March 1, the balance was $10,000 ($70,000 borrowed - $60,000 repaid). On March 31, the balance was $60,000 (no borrowing or repayment occurred during the month). Therefore, the average balance for March was $35,000.

The interest rate charged is 2% above the bank's prime lending rate. On March 1, the prime rate was 5%, so the interest rate charged was 7%.

Using the formula:

Interest Expense = Average Balance x Interest Rate x Time

where Time is the fraction of the year (1/12 for one month), we can calculate the interest expense for March:

Interest Expense = $35,000 x 7% x (1/12) = $204

Therefore, the answer is A) $219 (rounded to the nearest dollar).

Barrett Company Obtained a $80,000 Line of Credit from the Garden