Question

On January 1, Year XXX1, Muller Co. borrowed cash from Washington Valley Bank by issuing a $100,000 face value 3-year installment note payable that carried a 7% interest rate. The note is to be repaid by making annual cash payments of $38,105, which includes both principal and interest. The payments are to be made on December 31 of each year. Required: a) Calculate the interest expense to be reported with respect to this loan in the income statements for Year XXX1, Year XXX2, and Year XXX3. b) Calculate the amount of loan to be reported in the balance sheets prepared at the end of Year XXX1, Year XXX2, and Year XXX3. c) Calculate the amount of prinicpal paid by Muller to Washington Valley Bank for each of the years XXX1, XXX2, and XXX3.

Answer 1

Answer:

interest

7000

4822

2493

amortization

31,105

33,283

35,612

amount paid

31,105

64,388

100000

Explanation:

We have to solve for the interest on the outstanding loan

we build up the loan schedule:

$\left[\begin{array}{ccccccc} Year& Beg& quota& interest& amortization& ending& amount paid\\1&100000&38105&7000&31105&68895&31105\\2&68895&38105&4822&33283&35612&64388\\3&35612&38105&2493&35612&0&100000\\\end{array}\right]$

We multiply the beginning loan by the 7% interest expense to get the interest

then, we subtract from the quota the interest and get the amortization.

We subtract the amortization from the beginning outstanding balance and get the ending balance.