Question

Carla bought a computer at a cost of $ 45,000. To finance the purchase, he signed a five-year promissory note, which requires five equal annual payments. Carla will make the first payment in a year. Each payment will be in the amount of $ 12,795. to.

a. Determine the interest rate on this note.

b. Prepare the wage entries Carla will do for the first payment and for the last payment.

c. Suppose that immediately after making the second payment, Carla refinances and signs a new three-year note for the amount owed on the first note and the interest rate is 10.25%, how much will be the annual payment on the new note.

Answer 1

Answer for a):

Cost of Computer: $ 45,000

1st Installement: $ 12, 795

Amount to be paid for 5 Installements: $ 12,795 X 5 = $ 63,975.

Interest = $ 63,975 - $ 45,000 = $ 18,975.

As formula for Rate of Interest is = (Interest X 100) / (Principle X Time)

Hence Rate of Interest will be: (18,975 X 100) / (45,000 X 5) = 8.43%

Answer for b):

1- Wage Entry for 1st Payment:

Purchase Account debit = $ 12,795

To Cash = $ 12,795

2- Wage Entry for Last Payment:

Bill's Payble account Debit = $ 12,795

To Cash = $ 12, 795

Answer for c):

After 1st Payment remaining amount to be paid = $ 45,000 - $ 12,795 = $ 32,205.

The remaining amount is paid in 3 installement.

Rate of interest: 10.25%

Amount of interest after after 3 Years : (32,205 X 10.25 X 3) / 100 = $ 10,144.57

Total Amount paid after 3 Years: $ 32,205 + $ 10,144.57 = $ 42,349.57

Amount paid for each installement: = ($ 42,349.57) / 3 = $ 14,116.52.