SECTION 7-4 Finance Charge: Average-Daily-Balance

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Presentation transcript:

SECTION 7-4 Finance Charge: Average-Daily-Balance Method (New Purchases Included) pp. 268-272

Formulas Average Daily Balance = Sum of Daily Balances ÷ Number of Days Finance Charge = Average Daily Balance × Periodic Rate New Balance = Unpaid Balance + Finance Charge + New Purchases

Example 1 Ashley May has a charge account where the finance is computed using the average-daily-balance method that includes new purchases. She checks to be sure the average daily balance is correct. Her account statement is shown in Figure 7.7 below.

Figure 7.7

Figure 7.7 (cont.)

Example 1 Answer: Step 1 Find the sum of daily balances.

Example 1 Answer: Step 2 Find the average daily balance. Sum of Daily Balances ÷ Number of Days $3,628.50 ÷ 31 = $117.048 or $117.05

Example 2 Ashley May(from Example 1) checks the finance charge and the new balance. The finance charge is 2 percent of the average daily balance. What is the new balance?

Example 2 Answer: Step 1 Find the unpaid balance. Previous Balance – (Payments + Credits) $125.80 – $70.00 = $55.80

Example 2 Answer: Step 2 Find the finance charge. Average Daily Balance × Periodic Rate $117.05 × 2% = $2.3418 or $2.34

Example 2 Answer: Step 3 Find the new purchases. $25.85

Example 2 Answer: Step 4 Find the new balance. Unpaid Balance + Finance Charge + New Purchases $55.80 + $2.34 + $25.85 = $83.99

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