Company C purchased a truck for an agreed price of $30,000 on January 1, 2010 pa

Question

Company C purchased a truck for an agreed price of $30,000 on January 1, 2010 paid $ 5,000 down and financed the balance with the dealer at an annual interest rate of 9% payments were due each quarter end for 12 quarters starting March 31,2010 It is clear that the truck could have been purchased for $28,400 cash Calculate the required payment under the note signed. Calculate the effective interest rate, as implied by the cash price of the truck. Prepare amortization table for both the legal note and the note with true effective interest. Make the entry to record the purchase of truck Make entry needed on December 31, 2010 Assume that after interest is paid in December 31, 2010 the loan is paid off and retired. Prepare the needed entry Given the early repayment, what was the effective quarterly interest rate?

Explanation / Answer

Formula for loan amortization = A= [i*P*(1+i)^n]/[(1+i)^n-1] Amt $ A = periodical installment ? P=Loan amount =             25,000 i= interest rate per period =                  2.25 per qtr n=total no of payments                      12 A = [0.0225*25000*1.0225^12]/[1.0225^12-1] = 2400.435 So the installment amt =$2400.35 per quarter Effective interest = (1+1/n)^n -1 0.093083319     = 9.30% pa 2.325% per qtr Amortization Table Loan 25000 Quarter Installment Principal Interest Balance Principal 1 2400.435 1837.935 562.5 23162.065 2 2400.435 1879.288538 521.1465              21,282.78 3 2400.435 1921.57253 478.8625              19,361.20 4 2400.435 1964.807912 435.6271              17,396.40 5 2400.435 2009.01609 391.4189              15,387.38 6 2400.435 2054.218952 346.216              13,333.16 7 2400.435 2100.438878 299.9961              11,232.72 8 2400.435 2147.698753 252.7362                 9,085.02 9 2400.435 2196.021975 204.413                 6,889.00 10 2400.435 2245.432469 155.0025                 4,643.57 11 2400.435 2295.9547 104.4803                 2,347.61 12 2400.435 2347.61368 52.82132                         0.00 3805.221 Amortization Table with effective interest Loan 25000 Quarter Installment Principal Interest Balance Principal 1 2400.435 1819.185 581.25 23180.815 2 2400.435 1861.481051 538.9539              21,319.33 3 2400.435 1904.760486 495.6745              19,414.57 4 2400.435 1949.046167 451.3888              17,465.53 5 2400.435 1994.36149 406.0735              15,471.17 6 2400.435 2040.730395 359.7046              13,430.44 7 2400.435 2088.177377 312.2576              11,342.26 8 2400.435 2136.727501 263.7075                 9,205.53 9 2400.435 2186.406415 214.0286                 7,019.12 10 2400.435 2237.240364 163.1946                 4,781.88 11 2400.435 2289.256203 111.1788                 2,492.63 12 2400.435 2342.481409 57.95359                    150.15 Journal entry Purchase Date Account Dr $ Cr $ Jan 1. 2010. Truck 30000 Note Payable 25000 Cash 5000 Dec 31 2010. Cash 2400.44 Interest Expense 435.63 Note Payable 1964.81 Payment of installment Preapyment of loan after 1 year Note Payable       17,396.40 Cash       17,396.40 prepayment of loan effective interest per Qtr in prepayment Interest paid in a year 1998 Total principal paid 25000 Interest paid in a year % 7.99% Effective interest per Qtr 2.00%

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