Question

Exercise 23.6 Budgeting for Interest Expense (LO23-4, LO23-5)

On February 1, Willmar Corporation borrowed $100,000 from its bank by signing a 12 percent, 15-year note payable. The note calls for 180 monthly payments of $1,450. Each payment includes an interest and a principal component.

a. Compute the interest expense in February.

b. Compute the portion of Willmar’s March 31 payment that will be applied to the principal of the note. (Round your intermediate calculations and final answer to the nearest dollar amount.)

c. Compute the carrying value of the note on April 30. (Round your intermediate calculations and final answer to the nearest dollar amount.)

Answer 1

Calculations:

Amortization Table (Partial)
	Cash paid	Interest expense	Decrease in principal	Carrying amount
				$100,000
February	$1,450	$1,000	$450	$99,550
March	$1,450	$996	$455	$99,096
April	$1,450	$991	$459	$98,636

Cash paid = Monthly installment

Interest expense = Preceding carrying amount x 1% [Annual rate is 12%. So, monthly rate is 1%]

Decrease in principal = Cash paid - Decrease in principal

Carrying amount = Preceding carrying amount - Decrease in principal

Requirement 1:

Interest expense for February is $,1000

Requirement 2:

Portion of Willmar’s March 31 payment that will be applied to the principal of the note is $ 455

Requirement 3:

carrying value of the note on April 30 is $$98,636