Prime rate with interest payments

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On January 1, 2010, Hays Corporation arranged a $3,000 line of credit with the Barnett Bank. It agreed to accept the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and payments on principal are to take place on January 1 of each year.

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Hays began its loan transactions with Barnett Bank by borrowing $1,000 on January 1, 2010. Which of the following answers shows the effect of this event on the financial statements?

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Choice D

Choice C

Choice B

Choice A

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Hays paid the first year's interest payment on December 31, 2010. Barnett Bank's prime rate was 4 percent for 2010. Which of the following answers shows the effect of this event on the financial statements?

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Choice A

Choice C

Choice B

Choice D

Required information

On January 1, 2011, Hays borrowed an additional $1,000 from Barnett Bank, bringing the total amount borrowed to $2,000. On January 1, 2012, Hays paid $500 on the principal of the loan. On December 31, 2012, Hays records the 2012 interest payment. The prime rate for 2012 was 5 percent. Which of the following answers shows the effect of the 2012 interest payment on the financial statements?

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Choice A

Choice C

Choice D

Choice B

Reference no: EM13942486

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