Can anyone please explain me from where they got $10502 interest outflow?
CPA 2016.0 BEC
Debt, Equity, Leasing, Question # 300
The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any
shortterm
borrowings) as follows:
Cash (Millions)
Inflows
Outflows
January
$2 $1
February 2 4
March 2 5
April 2 3
May 4 2
June 5 3
Garth has a line of credit of up to $4 million, on which it pays interest monthly at a rate of 1% of the amount utilized.
Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit.
Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the
first half of the year?
A. $0
B. $61,000
Incorrect C. $80,000
D. $132,000
You answered C. The correct answer is B.
To calculate how much Garth will pay in interest during the first half of the year, the table provided must be used to
develop an ongoing cash/credit balance:
Cash Change in
Opening Cash Cash Outflow for Line of Ending Cash
Cash Balance Inflows Outflows Interest Credit Balance
2,000,000
2,000,000 1,000,000
3,000,000
12/30/2016 bec2016.ninjacpareview.com/PrintPage.aspx?SessionQuestionId=37d81fba2c28410dae927bc7cd94a424
https://bec2016.ninjacpareview.com/PrintPage.aspx?SessionQuestionId=37d81fba2c28410dae927bc7cd94a424
2/2
3,000,000 2,000,000 4,000,000
1,000,000
1,000,000 2,000,000 5,000,000
2,000,000 0
0 2,000,000 3,000,000
20,000
1,020,000 0
0 4,000,000 2,000,000
30,200
1,969,800
0
0 5,000,000 3,000,000
10,502
1,050,200
939,298
Opening Balance Change in Ending Balance Interest
Line of Credit Line of Credit Line of Credit Payments
0
0 0 0
0 0 0 0
0 2,000,000 2,000,000 0
2,000,000 1,020,000 3,020,000 20,000
3,020,000 1,969,800
1,050,200 30,200
1,050,200 1,050,200
0 10,502
60,702
The total interest payments as shown above equal $60,702. This is approximately $61,000.
The trick with this problem is to remember that interest is an additional cash outflow in the month paid.
.