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 use the average daily balance method, we must find the sum of the daily balances divided by the number of days in the billing cycle.

The daily balance is calculated by taking the previous day's balance, adding any new charges or subtracting any payments, and then repeating this process for each day in the billing cycle.

For this problem, we can assume that there are no new charges or payments, so the daily balance will remain constant at $1240. Therefore, the average daily balance will also be $1240.

The formula for calculating interest using the average daily balance method is: Average Daily Balance x Interest Rate x Number of Days in the Billing Cycle / 365.

Plugging in the numbers from the problem, we get:

$1240 x 0.22 x 28 / 365 = $19.71

Therefore, the amount of interest charged at the end of the billing cycle is $19.71, which corresponds to answer choice B.

Use the Average Daily Balance Method to Compute the Amount