Colson Company has a line of credit with Federal Bank. Colson can borrow up to $800,000 at any time over the course of the calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the first four months of the year. Colson agreed to pay interest at an annual rate equal to 2 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Colson pays 6 percent (4 percent + 2 percent) annual interest on $80,000 for the month of January.

Required

a. Compute the amount of interest that Colson will pay on the line of credit for the first four months of the year. Round answers to nearest whole dollar.

b. Compute the amount of Colson’s liability at the end of each of the first four months.

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Amount Borrowed Prime Rate for Month or (Repald) the Month January February March April $80,000 50,000 (30,000) 20,000 4.0% 4.25 4.5 4.25