Shim Company has a line of credit with Bay Bank. Shim can borrow up to \($200,000\) at any time over the course of the 2006 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during 2006. Shim agreed to pay interest at an annual rate equal to 1 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Shim pays 5 percent (4 percent + 1 percent) annual interest on \($70,000\) for the month of January.

Shim earned \($18,000\) of cash revenue during 2006.

Required:

a. Organize the information in accounts under an accounting equation.

b. Prepare an income statement, balance sheet, and statement of cash flows for 2006.

c. Write a memo discussing the advantages to a business of arranging a line of credit.

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Month January February March April through October November December Amount Borrowed or (Repaid) $70,000 40,000 (20,000) No change (30,000) (20,000) Prime Rate for the Month, % 4 4 5 No change 5 4