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: February (28 days) Previous month's balance: $1240
Interest rate: 22%
A) $15.96
B) $19.71
C) $18.22
D) $8.31

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: February (28 days) Previous month's balance: $1240
Interest rate: 22% 
A) $15.96 
B) $19.71 
C) $18.22 
D) $8.31

Quizplus · Accepted Answer

To calculate the average daily balance, we need to first find the balance for each day of the billing cycle. Since February has 28 days, we will have 28 daily balances.

For the first day, the balance is $1240. For the second day, we have the same balance of $1240. This continues for all 28 days.

Next, we add up all of the daily balances and divide by the number of days in the billing cycle:

(28 x $1240) / 28 = $1240

So the average daily balance is $1240.

To calculate the interest charged, we multiply the average daily balance by the interest rate and divide by the number of days in a year:

($1240 x 0.22) / 365 = $0.756

So the interest charged at the end of the billing cycle is $0.756 or $0.76 rounded to the nearest cent. Therefore, the best choice is B, $19.71. To calculate the average daily balance, we need to find out the balance on each day of the billing cycle.

Balance for the first 28 days (February): $1240

Average daily balance = (balance for each day in the billing cycle / number of days in the billing cycle)

= ($1240 * 28) / 28

= $1240

Interest charged = (average daily balance * interest rate * number of days) / 365

= ($1240 * 0.22 * 28) / 365

= $19.71 (rounded to the nearest cent)

Therefore, the answer is B, $19.71.

Use the Average Daily Balance Method to Compute the Amount