Georgia company borrowed 600,000 from a bank on may 1, 2007. the bank required a

Question

Georgia company borrowed 600,000 from a bank on may 1, 2007. the bank required a return of 12% on the loan. The loan is to be repaid over 12 months in equal installments. georgia companys fiscal year ends on december 31.

a. prepare an amortization table for the loan for the 12 month period.

b. how much interest expense would Georgia report on the loan for its 2007 fiscal year?

c. how much interest expense would it report for 2008?

d. what amount of liability would Georgia report for the loan at the end of 2007?

e. What amount would it report at the end of 2008?

Explanation / Answer

Loan Amount: $600,000

Rate of Return = 12%

Number of Periods: 12

Because these are equal installments, we must first calculate amount to be paid per month using the present value of an annuity. 

12%/12 periods = 6.1944

Divide that by 600,000:

600,000 / 6.1944 = $96,861.68 <= Amount you will pay per month.

A portion goes for interest payments, a portion for deducting the remaining balance. [Rounding off is the reason why we have a minimal amount in the remaining balance, although this is negligible]

 

 

b) May 1 to December 31 2007, has 7 periods, so add the interest expense of period 1 to 7:

$427202

c) And of course, periods 8 to 12 will be for 2008.

$135148

d) This is simply your remaining balance at the end of period 7, which is:

$349170.23

e) You have paid all your liabilites by May 2008, so by the end of 2008, the liability for that note would be:

$0.

Hope that hleps :)

Period Amount Paid Interest Expense Balance 0     600,000.00 1 96861.68 72000 575,138.32 2 96861.68 69016.6 547,293.24 3 96861.68 65675.19 516,106.75 4 96861.68 61932.81 481,177.88 5 96861.68 57741.35 442,057.55 6 96861.68 53046.91 398,242.78 7 96861.68 47789.13 349,170.23 8 96861.68 41900.43 294,208.98 9 96861.68 35305.08 232,652.38 10 96861.68 27918.28 163,708.98 11 96861.68 19645.08 86,492.38 12 96861.68 10379.08 9.78

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