Busch Corporation has an existing loan in the amount of $9 million with an annual interest rate of 5.7%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to replace Busch Corporation's existing loan agreement with a new one. United National Bank has offered to loan Busch $9 million at a rate of 4.5% but requires Busch to provide financial statements that have been reviewed by a CPA firm. Earn More Bank has offered to loan Busch 59 million at a rate of 3.7% but requires Busch to provide financial statements that have been audited by a CPA firm. Busch Corporation's controller approached a CPA firm and was given an estimated cost of $33,000 to perform a review and $66,000 to perform an audit. Read the requirements. (Enter amounts in dollars, not millions, throughout.) - X Requirements a. Explain why the interest rate for the loan that requires a review report is lower than that for the loan that does not require a review. Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans. b. Calculate Busch Corporation's annual costs under each loan agreement, including interest and costs for the CPA firm's services. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from Earn More Bank. C. Assume that United National Bank has offered the loan at a rate of 4.5% with a review, and the cost of the audit has increased to $146,000 due to new auditing standards requirements. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from Earn More Bank d. Discuss why Busch may desire to have an audit, ignoring the potential reduction in interest costs. e. Explain how a strategic understanding of the client's business may increase the value of the audit service. Print Done Requirement a. Explain why the interest rate for the loan that requires a review report is lower than that for the loan that does not require a review. Explain why the interest rate for the loan that requires an audit report is lower than the interest rate for the other two loans. The interest rate for the loan that requires a review report is lower than the loan that does not require a review because of the lower information risk. A review report provides moderate assurance to financial statement users. Compared to a review report, an audit provides further assurance and thus lower information risk. As a result, the interest rate is lowest for the loan with the audit report. Requirement b. Calculate Busch Corporation's annual costs under each loan agreement, including interest and costs for the CPA firm's services. Indicate whether Busch should keep its existing loan, accept the offer from United National Bank, or accept the offer from Earn More Bank. Begin by calculating the annual costs under each loan agreement. (Complete all input fields. Enter a "0" for any zero balances.) Cost of CPA Annual Loan Lender Services Annual Interest Cost Existing loan (No CPA service) United National Bank (CPA Review service) Earn More Bank (CPA Audit service)
