Colson Company has a line of credit with Federal Bank

Answer:

Funds are borrowed and repaid on the first day of the month

Interest will be calculated on the last day of the month

The rate of interest for each month will be Prime Rate for the month + 2%

As we know Colson company has to pay the interest on line of credit on monthly basis so, we need to calculate the interest per day wise that means for January - 31 days, for February - 28 days so on.

The interest rates given are annual interest rates for to calculate per day basis we need to divide the interest rate by 365 days (no. of days in a year)

For January, the rate of interest is Prime Rate for the month + 2% = 4.25% + 2% = 6.25%

To calculate the interest for January, we can use the below formula

Amount borrowed * [(Interest for the month/365 days)*31 days]

= $83,700 * [(6.25% / 365) *31] = $440.30

For February, the total borrowed amount will be

Line of credit balance at the end of previous month + Amount borrowed in current month - Amount repaid in current month (Interest is not added in the line of credit ending balance for last month as the interest is payable per month)

For February, the total line of credit amount for interest calculation =  $83,700 + $119,700 - $0 = $203,400

Similarly we have calculated the interest and the line of credit balance at end month each month and at the beginning of each month in the below schedule

The column 5 ( line of credit at the beginning of the month) is calculated by the below formula

Line of credit balance at the end of previous month (Col.9) + Amount borrowed in current month (Col.3) + Amount (repaid) in current month (Col. 4) (as repaid amount is shown in negative)

(a). Amount of interest that Colson will pay on the line of credit for the first 4 months of the year 1 is shown below

(b) The amount of Colson's liability at the end of each of the first 4 month is shown below\

PLEASE SEE THE ATTACHED FILE.