Question 1 : On December 31, 2004, Frye Co. has $6,000,000 of short-term notes p

Question

Question 1:

On December 31, 2004, Frye Co. has $6,000,000 of short-term notes payable due on February 14, 2005. On January 10, 2005, Frye arranged a line of credit with County Bank which allows Frye to borrow up to $4,500,000 at one percent above the prime rate for three years. On February 2, 2005, Frye borrowed $3,600,000 from County Bank and used $1,500,000 additional cash to liquidate $5,100,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2004 balance sheet which is issued on March 5, 2005 is

a. $0.

b. $900,000.

c. $1,500,000.

d. $2,400,000.

Show your work and how you got to the answer. Thanks.

Explanation / Answer

A line of credit is credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of commercial bills, traditional revolving credit card account, etc. It is effectively a source of funds that can readily be tapped at the borrower's discretion. Interest is paid only on money actually withdrawn. (However, the borrower may be required to pay an unused line fee, often an annualized percentage fee on the money not withdrawn.) Lines of credit can be secured by collateral, or may be unsecured.

A) Short term notes payable      =$6,000,000

B) Less:

     Borrwing from country bank =$3,600,000

     Additional cash                       =$1,500,000

C) Short term notes payable         =$900,000

So, Option b is the answer

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