Melvin Company has a line of credit with Bay Bank. Melvin can borrow up to $590,
ID: 2427821 • Letter: M
Question
Melvin Company has a line of credit with Bay Bank. Melvin can borrow up to $590,000 at any time over the course of the 2014 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2014. Melvin agreed to pay interest at an annual rate equal to 1 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Melvin pays 7 percent (6 percent + 1 percent) annual interest on $90,000 for the month of January.
Melvin earned $44,000 of cash revenue during 2014.
Organize the information in accounts under an accounting equation.
Melvin Company has a line of credit with Bay Bank. Melvin can borrow up to $590,000 at any time over the course of the 2014 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2014. Melvin agreed to pay interest at an annual rate equal to 1 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Melvin pays 7 percent (6 percent + 1 percent) annual interest on $90,000 for the month of January.
Month Amount Borrowedor (Repaid) Prime Rate for
the Month, % January $ 90,000 6 February 66,000 6 March (54,000 ) 7 April through October No change No change November (39,000 ) 7 December (27,000 ) 6
Melvin earned $44,000 of cash revenue during 2014.
a.Organize the information in accounts under an accounting equation.
Event Assets Liabilities Stockholders Equity Accounts Titles Event Cash Notes Payable Retained Earnings Accounts Titles Jan Jan Feb Feb Mar Mar Apr May June July Aug Sep Oct Nov Nov Dec Dec Rev Bal
Explanation / Answer
Information in accounts under an accounting equation.
Month
Event
Assets
Liabilities
Stockholders’ Equity
Cash
Notes Payable
Retained Earnings
Jan
Amount Borrowed
$ 90,000.00
$ 90,000.00
Jan
Interest Paid
$ (525.00)
$ (525.00)
(90000*7%/12)
Feb
Amount Borrowed
$ 66,000.00
$ 66,000.00
Feb
Interest Paid
$ (910.00)
$ (910.00)
(90000+66000)= 156000*7%/12
Mar
Amount Repaid
$ (54,000.00)
$ (54,000.00)
Mar
Interest Paid
$ (680.00)
$ (680.00)
(156000-54000) = 102000*8%/12
Apr
Interest Paid
$ (680.00)
$ (680.00)
May
Interest Paid
$ (680.00)
$ (680.00)
June
Interest Paid
$ (680.00)
$ (680.00)
July
Interest Paid
$ (680.00)
$ (680.00)
Aug
Interest Paid
$ (680.00)
$ (680.00)
Sep
Interest Paid
$ (680.00)
$ (680.00)
Oct
Interest Paid
$ (680.00)
$ (680.00)
Nov
Amount Repaid
$ (39,000.00)
$ (39,000.00)
Nov
Interest Paid
$ (420.00)
$ (420.00)
(102000-39000) = 63000*8%/12
Dec
Amount Repaid
$ (27,000.00)
$ (27,000.00)
Dec
Interest Paid
$ (210.00)
$ (210.00)
(63000-27000) = 36000*7%/12
Rev
$ 44,000.00
Bal
$ 36,000.00
$ 36,000.00
$ 36,495.00
Information in accounts under an accounting equation.
Month
Event
Assets
Liabilities
Stockholders’ Equity
Cash
Notes Payable
Retained Earnings
Jan
Amount Borrowed
$ 90,000.00
$ 90,000.00
Jan
Interest Paid
$ (525.00)
$ (525.00)
(90000*7%/12)
Feb
Amount Borrowed
$ 66,000.00
$ 66,000.00
Feb
Interest Paid
$ (910.00)
$ (910.00)
(90000+66000)= 156000*7%/12
Mar
Amount Repaid
$ (54,000.00)
$ (54,000.00)
Mar
Interest Paid
$ (680.00)
$ (680.00)
(156000-54000) = 102000*8%/12
Apr
Interest Paid
$ (680.00)
$ (680.00)
May
Interest Paid
$ (680.00)
$ (680.00)
June
Interest Paid
$ (680.00)
$ (680.00)
July
Interest Paid
$ (680.00)
$ (680.00)
Aug
Interest Paid
$ (680.00)
$ (680.00)
Sep
Interest Paid
$ (680.00)
$ (680.00)
Oct
Interest Paid
$ (680.00)
$ (680.00)
Nov
Amount Repaid
$ (39,000.00)
$ (39,000.00)
Nov
Interest Paid
$ (420.00)
$ (420.00)
(102000-39000) = 63000*8%/12
Dec
Amount Repaid
$ (27,000.00)
$ (27,000.00)
Dec
Interest Paid
$ (210.00)
$ (210.00)
(63000-27000) = 36000*7%/12
Rev
$ 44,000.00
Bal
$ 36,000.00
$ 36,000.00
$ 36,495.00