Barkely's Has a Line of Credit with a Local Bank

question 141

Multiple Choice

Barkely's has a line of credit with a local bank in the amount of $125,000. The loan agreement calls for interest of 8% with a compensating balance of 4%, which is based on the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs to borrow $58,000 for one year to cover operating expenses?

• A) 7.68%
• B) 7.81%
• C) 8.00%
• D) 8.17%
• E) 8.33%

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Definitions:

60-Day Note

A type of short-term debt where the repayment is due 60 days after issuance.

360-Day Year

An accounting simplification that assumes there are 360 days in a year to facilitate easier interest calculations.

Direct Write-Off Method

An accounting practice where bad debts are written off against income at the time they are determined to be uncollectible, instead of being provided for in advance.

Account Receivable

Funds that customers owe a company for products or services provided on credit.