On January 1, Scott Corporation received a $300,000 line of credit at an interest rate of 12% from Main Street Bank and drew down the entire amount on... Accounting MCQs | Accounting MCQs

On January 1, Scott Corporation received a $300,000 line of credit at an interest rate of 12% from Main Street Bank and drew down the entire amount on February 1. The line of credit agreement requires that an amount equal to 15% of the loan be deposited into a compensating balance account. What is the effective annual cost of credit for this loan arrangement?

11.00%
12.00%
12.94%
14.12%Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (D) is correct. The effective interest rate on this financing arrangement can be calculated as follows: Effective rate = Stated rate ÷ (1.0 – Compensating balance %) = 12% ÷ (100% – 15 = 12% ÷ 85% = 14.12% The amount of the loan is not needed to calculate the effective rate.