Elite Boat Sales uses a line of credit to help finance its inventory purchases.
ID: 2590074 • Letter: E
Question
Elite Boat Sales uses a line of credit to help finance its inventory purchases. Elite Boat Sales sells boats and equipment and uses the line of credit to build inventory for its peak sales months, which tend to be clustered in the summer months. Account balances at the beginning of 2018 were as follows.
Elite Boat Sales experienced the following transactions for April, May, and June 2018:
1.April 1, 2018, obtained approval for a line of credit of up to $700,000. Funds are to be obtained or repaid on the first day of each month. The interest rate is the bank prime rate plus 1 percent.
2.April 1, 2018, borrowed $190,000 on the line of credit. The bank’s prime interest rate is 5 percent for April.
3.April 15, purchased inventory on account, $210,000.
4.April 31, paid other operating expenses of $105,000.
5.In April, sold inventory for $420,000 on account. The inventory had cost $250,000.
6.April 30, paid the interest due on the line of credit.
7.May 1, borrowed $230,000 on the line of credit. The bank’s prime rate is 6 percent for May.
8.May 1, paid the accounts payable from transaction 3.
9.May 10, collected $380,000 of the sales on account.
10.May 20, purchased inventory on account, $230,000.
11.May sales on account were $510,000. The inventory had cost $305,000.
12.May 31, paid the interest due on the line of credit.
13.June 1, repaid $150,000 on the line of credit. The bank’s prime rate is 6 percent for June.
14.June 5, paid $280,000 of the accounts payable.
15.June 10, collected $630,000 from accounts receivable.
16.June 20, purchased inventory on account, $375,000.
17.June sales on account were $605,000. The inventory had cost $370,000.
18.June 31, paid the interest due on the line of credit.
Required
What is the amount of interest expense for April? May? June?
What amount of cash was paid for interest in April? May? June?
(For all requirements, Do not round intermediate calculations and round your answers to nearest whole dollar amount.)
Explanation / Answer
Answer
Interest expense
April =$1,90,000*6/100*1/12=$950
May =($1,90,000+2,30,000)*7/100*1/12=$2,450
June=($1,90,000 +$2,30,000-$1,50,000)*7/100*1/12=$1,575
Amount of cash paid on a/c of interest is
April =$9,50
May =$2, 450
June =$1,575
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