The Red Company has a revolving line of credit of $300,000 with a 1-year maturity. The terms call for a 6% interest rate and a 1/2% commitment fee on ... Accounting MCQs | Accounting MCQs

The Red Company has a revolving line of credit of $300,000 with a 1-year maturity. The terms call for a 6% interest rate and a 1/2% commitment fee on the unused portion of the line of credit. The average loan balance during the year was $100,000. The annual cost of this financing arrangement is

$6,000
$6,500
$7,000$7,500Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (C) is correct. The annual cost of Red’s financing arrangement can be calculated as follows: Annual cost = Interest expense on average balance + Commitment fee on unused portion = (Average balance × Stated rate) + [(Credit limit – Average balance) × Commitment fee %] = ($100,000 × 6%) + [($300,000 – $100,000) × 0.5%] = $6,000 $1,000 = $7,000