E connect All applicable Exercises in Series A cre availab All applicable Exerci
ID: 2514049 • Letter: E
Question
E connect All applicable Exercises in Series A cre availab All applicable Exercises in Series A re availab Mct Hll ACCOUNTING Connect Plus Accounting. Exercisd 10-1A ) Interest only versus an installment note Sanders Co. is planning to finance an expansion of its operations by borrowing S150,000. C Bank has agreed to loan Sanders the funds. Sanders has two repayment options:(1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay $15,000 of the principal each year along with the annual interest based on the unpaid prin. cipal balance. Assume the interest rate is 8 percent for each option. City Required a. What amount of interest will Sanders pay in year 1 (1) Under option 1? (2) Under option 2? b. What amount of interest will Sanders pay in year (1) Under option 1? (2) Under option 2? Explain the advantage of each option. c.Explanation / Answer
In first option: Annually interest payable will be= amount*ineterest rate= 150000*.08=12,000
And for 10 years total interest paid will be 12000*10=120,000
In second option: (please refer below table
Outstanding principal (a)
(previous OS principal-15000)
Installment amount (c)
(b)+(d)
Total Interest Paid (total of column (c)): 66,000
Question a. Year 1 interest:
under option (1)= 12,000
under option (2)= 12,000
Ques b. Year 2 Interest:
under option (1)= 12,000
under option (2)= 10,800
Ques c.
In option one, there is no installment payment for principal. But interest will have to be paid annually. So there is less burden on year to year basis comparing to option 2. Calculation is also simple for interest calculation
In option two, less interst will be paid as annually principle repayment will be made. Therefore less cost for amount borrowing under option 2.
Outstanding principal (a)
(previous OS principal-15000)
Interest (OS Principal*.08) (b)Installment amount (c)
(b)+(d)
princple amount in installment (d) Interest amount in installment (e) 150000 12000 27000 15000 12000 135000 10800 25800 15000 10800 120000 9600 24600 15000 9600 105000 8400 23400 15000 8400 90000 7200 22200 15000 7200 75000 6000 21000 15000 6000 60000 4800 19800 15000 4800 45000 3600 18600 15000 3600 30000 2400 17400 15000 2400 15000 1200 16200 15000 1200Related Questions
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