Question

3. 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:

Month Amount Borrowed (Repaid) Prime Rate for the Month

January $ 32,000 6 %

February $ 48,000 5 %

March $ (32,000 ) 3 %

The amount of interest paid at the end of March would be: (Do not round intermediate calculations.)

a) $200

b) $120

c) $240

d) $213

Answer 1

Ans: a) $ 200

North Woods repaid the $ 32000 borrowed in january on March 1. Therefore , the company owes interest on the $ 48000 borrowed in February at a rate of 5% ( 3% + 2% )

that is

The amount of interest paid at the end of March = Borrowings x interest rate x 1/12

= $ 48000 x 5% x 1/12 = $ 200

North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate.

Rate of Interest = Prime Rate for the Month + Annual rate = 3% + 2% = 5%

5% for annualy , tharefore multiplied with 1/12 for computing interest for March.

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