Ace the CMA 2025 Challenge – Unlock Your Accounting Superpowers!

When calculating the loan amount when compensating balances are involved, understanding the relationship between the loan proceeds and the compensating balance is essential. Compensating balances are minimum balances that a borrower must maintain in their account as a condition of the loan, which, in effect, reduces the actual funds available from the loan.

Using the formula, usable funds are what the borrower can actually access. The compensating balance percentage indicates a portion of the total loan that must remain in the account and cannot be used. Therefore, if you divide the usable funds by (1.0 minus the compensating balance percentage), you arrive at the total loan amount that needs to be issued by the lender to account for the locked-in funds due to the compensating balance requirement.

This process ensures that the borrower receives the intended amount for their needs after the necessary compensating balance is set aside, thereby providing a clear method for calculating how much of a loan should be taken to allow for that balance.

This approach directly addresses the essence of managing loan agreements involving compensating balances, contrary to other options that may misrepresent the relationship or fail to account for the lock-in effect of compensating balances accurately.