Accounting for a line of credit
Song Co. uses an approved line of credit not to exceed $250,000 with the local bank to provide short term financing for its business operations. Song either borrows or repays funds on the first day of a month. Interest is payable monthly at the bank’s prime interest rate plus 1 percent. The following table shows the amounts borrowed and repaid for 2010 along with the bank’s prime interest rate.
|
Amount Borrowed |
Prime Rate for |
|
|
Month |
or (Repaid) |
the Month, % |
|
January |
70,000 |
4 |
|
February |
$40,000 |
4 |
|
March |
(20,000) |
4.5 |
|
April |
(10,000) |
5 |
|
May |
(20,000) |
4 |
|
June |
(10,000) |
4.5 |
|
July–October |
0 |
4.5 |
|
November |
40,000 |
5.5 |
|
December |
(20,000) |
5.25 |
Required
a. Show the effects of these transactions on the financial statements using a horizontal statements model like the one shown here. Use a + to indicate increase, a for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA).
|
Assets |
= |
Liabilities |
+ |
Equity |
Rev. |
Exp. |
= |
Net Inc. |
Cash Flow |
b. What is the total amount of interest expense paid for 2010?