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Exercise - Effect of a line of credit on financial statements
Sims Company has a line of credit with Bay Bank. Sims can borrow up to $400,000 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. Sims 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, Sims pays 6 percent (5 percent + 1 percent) annual interest on $60,000 for the month of January.
Month
Amount Borrowed or (Repaid)
Prime Rate for the Month
January
$60,000
5%
February
40,000
5
March
(30,000)
6
April through October
No change
November
(20,000)
December
(10,000)
What is the total amount of interest expense paid for 2014?
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