Upton Company obtained an $80,000 line of credit from the Key State Bank on January 1,2012.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 2012 are shown in the following table.Assume that Upton 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

Upton Company obtained an $80,000 line of credit from the Key State Bank on January 1,2012.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 2012 are shown in the following table.Assume that Upton 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 the month of March, we need to calculate the average amount borrowed during that month.

The average = (Amount borrowed on January 1 + Amount borrowed on February 1 + Amount borrowed on March 1)/3

= (80,000 + 60,000 + 40,000)/3 
= 60,000

So, the average borrowed amount during the month of March is $60,000.

Now, we need to calculate the interest expense using the formula:

Interest expense = Average borrowed amount during the month × (Prime rate + 2%) × Time

In this case, the Prime rate + 2% = 4% (given that the bank's prime lending rate in March was 2%)

And Time = 1/12 (since we need to calculate the monthly interest)

So, Interest expense = 60,000 × 4% × 1/12 
= $200

Rounding to the nearest dollar, the interest expense for the month of March is $204 (Option D).

Upton Company Obtained an $80,000 Line of Credit from the Key