I am confused on this BEC question, please help

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    Topic
  • #177483
    kad022
    Member

    A company obtained a short-term bank loan of $500,000 at an annual interest rate of eight percent. As a condition of the loan,

    the company is required to maintain a compensating balance of $100,000 in its checking account. The checking account earns

    interest at an annual rate of three percent. Ordinarily, the company maintains a balance of $50,000 in its account for

    transaction purposes. What is the effect interest rate of the loan?

    a. 7.77 percent.

    b. 8. 50 percent.

    c. 9.44 percent.

    d. 8.56 percent.

    Becker answer is : Choice “d” is correct. 8.56%. To calculate the effect annualized percentage cost of financing:

    Step 1 Calculate the actual finance charge:

    Actual interest = (P x Rate x Time)

    $500,000 X 8% = $40,000

    Step 2 Subtract any interest earned (if any) on additional required compensating balance:

    Additional interest earned: $50,000 x .03 = $1,500

    Net interest cost= $40,000 [from Step 1] – $1,500 = $38,500

    Step 3 Divide the difference (net interest) by the loan proceeds the company has use of:

    Loan proceeds company has use of: $500,000- $50,000 (additional balance)= $450,000

    I get the big picture, but my question is why they dont use $100,000 but $50,000? Any ideas please, thanks in advance

    AUD 81
    FAR 76
    BEC 5/31/13
    REG 07/13

Viewing 6 replies - 1 through 6 (of 6 total)
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  • #412153
    Shanta_J
    Member

    Yes, if someone could please answer this. It would be much appreciated!

    REG*75* 02.27.13(1)
    AUD*82* 04.15.13(1)
    BEC 05.29.13
    FAR 08.12.13

    -Becker Self-Study-
    *Through God all things are Possible*

    #412154
    Shanta_J
    Member

    Oh wait… I think I understand. I believe they “did” use the $100K ….. but since the company “ordinarily maintains a $50K balance” they subtracted that amount from the $100K .

    If I am wrong, please correct me. Thanks

    REG*75* 02.27.13(1)
    AUD*82* 04.15.13(1)
    BEC 05.29.13
    FAR 08.12.13

    -Becker Self-Study-
    *Through God all things are Possible*

    #412155
    Shanta_J
    Member

    REG*75* 02.27.13(1)
    AUD*82* 04.15.13(1)
    BEC 05.29.13
    FAR 08.12.13

    -Becker Self-Study-
    *Through God all things are Possible*

    #412156
    MintsRGood
    Participant

    Yes Shanta_J, you are on the money! That is how I'm understanding it too! How is your prep going? 🙂

    REG: 75 DONE 🙂
    AUD: 61, 71, 68, 92 DONE 🙂
    BEC: 76 DONE 🙂
    FAR: 72, 74, 79 DONE 🙂
    Licensed Michigan CPA 🙂
    -Some people dream of success...others wake up and work hard for it!!!
    -The cowards never start and the weak die along the way!
    -You better work, b***h!
    -Only those who dare to fail greatly can ever achieve greatly.-JFK

    #412157
    Shanta_J
    Member

    Ohhh Mints… It's going -_- …I was suppose to have a power weekend, but that was an epic fail… SLEPT my life and watched Law and Order… ahahaha…… but I'm finishing up Chapter 6 now.. then starting my two week review on Wednesday before the big day….. I do not like how random all the material is… it doesn't really tick and tie like REG and AUD… Sigh…

    How is your studying going?

    REG*75* 02.27.13(1)
    AUD*82* 04.15.13(1)
    BEC 05.29.13
    FAR 08.12.13

    -Becker Self-Study-
    *Through God all things are Possible*

    #412158
    MintsRGood
    Participant

    Every now and then you need a day off, so just put in some extra hours during the week to catch up! That is great that you are finishing off B-6! Good luck on your final 2 week push! This material is so random, it drives me nuts too. Some modules I blast through and others are such a grind. BEC is the hot dog of the CPA exam, all the leftover and random parts get stuffed into this section! 😉

    Good luck!!!!!!!!!!!!!! 🙂

    REG: 75 DONE 🙂
    AUD: 61, 71, 68, 92 DONE 🙂
    BEC: 76 DONE 🙂
    FAR: 72, 74, 79 DONE 🙂
    Licensed Michigan CPA 🙂
    -Some people dream of success...others wake up and work hard for it!!!
    -The cowards never start and the weak die along the way!
    -You better work, b***h!
    -Only those who dare to fail greatly can ever achieve greatly.-JFK

Viewing 6 replies - 1 through 6 (of 6 total)
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