Skilantic Company needs to pay a supplier’s invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30... Accounting MCQs | Accounting MCQs

Skilantic Company needs to pay a supplier’s invoice of $60,000 and wants to take a cash discount of 2/10, net 40. The firm can borrow the money for 30 days at 11% per annum plus a 9% compensating balance.
Assuming Skilantic 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

11%
10%
12.09%
9.90%Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (C) is correct. Skilantic’s effective rate on this loan can be calculated as follows: Effective rate = Stated rate ÷ (1.0 – Compensating balance %) = 11% ÷ (100% – 9 = 11% ÷ 91% = 12.09%