Morton Company needs to pay a supplier’s invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 da... Accounting MCQs | Accounting MCQs

Morton Company needs to pay a supplier’s invoice of $50,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 12% per annum plus a 10% compensating balance.
Assuming Morton Company borrows the money on the last day of the discount period and repays it 30 days later, the effective interest rate on the loan is

12.00%
13.33%
13.20%
13.48%Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (B) is correct. Morton’s effective rate on this loan can be calculated as follows: Effective rate = Stated rate ÷ (1.0 – Compensating balance %) = 12% ÷ (100% – 10 = 12% ÷ 90% = 13.33%