Use the average daily balance method to compute the amount of interest that will be charged at the end of the billing
cycle. Use a 365-day year.
-Month: May (31 days) Previous month's balance: $960
Interest rate: 19%
A) $7.88
B) $12.35
C) $11.31
D) $8.76

Question

Use the average daily balance method to compute the amount of interest that will be charged at the end of the billing
 cycle. Use a 365-day year.
-Month: May (31 days) Previous month's balance: $960
Interest rate: 19% 
A) $7.88 
B) $12.35 
C) $11.31 
D) $8.76

Quizplus · Accepted Answer

Step 1: Calculate the average daily balance

Average Daily Balance = Sum of Daily Balances in the Billing Cycle / Number of Days in the Billing Cycle

We know the previous month's balance was $960 and we assume no new purchases or payments were made during the billing cycle. Therefore, the daily balance throughout the entire billing cycle is $960.

Sum of Daily Balances in the Billing Cycle = $960 x 31 = $29,760

Number of Days in the Billing Cycle = 31

Average Daily Balance = $29,760 / 31 = $960

Step 2: Calculate the interest charged using the average daily balance and interest rate

Interest Charged = Average Daily Balance x Interest Rate x Number of Days in the Billing Cycle / 365

Interest Rate = 19%

Number of Days in the Billing Cycle = 31

Interest Charged = $960 x 0.19 x 31 / 365 = $11.31

Therefore, the amount of interest charged at the end of the billing cycle is $11.31. Choice C is the best choice.

Use the Average Daily Balance Method to Compute the Amount