Question

Kara Ashdown's charge account's billing period is from February 1 through February 28. The finance company computes the finance charge using the average-daily-balance method and includes new purchases during the billing period. Her previous balance was $212.48. On February 8, she made a payment of $75.00. On February 23, she charged $35.23 to her account. If the periodic rate on Ashdown's account is 1.5 percent, find the average daily balance, finance charge, and new balance.

Answer 1

To determine Kara Ashdown's average daily balance, finance charge, and new balance: calculate daily balances for each period between transactions, compute the average daily balance and apply the 1.5% monthly periodic rate to it, and add the finance charge to the last balance.

Step-by-step explanation:

The process to calculate the average daily balance, finance charge, and new balance for Kara Ashdown's credit account using the average-daily-balance method involves several steps. First, we calculate the daily balances before and after each transaction within the billing period. Kara starts with a balance of $212.48 and makes a payment on February 8, leaving a period of 7 days with the initial balance. After the payment, she has a balance of $137.48 ($212.48 - $75) until she makes a new charge on February 23. This results in a period of 15 days with the second balance. From February 23 to February 28, she carries a new balance of $172.71 ($137.48 + $35.23) for 6 days. We then add up the daily balances and divide by the number of days in the billing period to get the average daily balance.

Using the periodic rate of 1.5 percent, the finance charge is calculated by multiplying the average daily balance by the monthly periodic rate (which is the annual periodic rate divided by 12, if the annual rate is given). To find the new balance, we add this finance charge to the balance at the end of the billing period.