Question

On April 1, 20x1, Sarah Davis received a $250,000 loan from her employer, Bounty Corporation. The actual rate of the loan was fixed at 3%, and the going market rate at the time the loan was taken out was 6%.

Relevant Facts:

• $200,000 of the loan was made to allow Sarah to purchase a new condominium in downtown for her own inhabitation.
• $50,000 of the loan was made to allow Sarah to purchase shares in a corporation related to her employer.
• On January 25th of each year, Sarah writes a cheque to Bounty Corporation in payment of the interest incurred for the previous year.
• Principal repayments of $10,000 annually will commence at the end of 20x5.

	1st	2nd	3rd	4th
Prescribed Rates:	20x1 – 4%	5%	4%	5%
	20x2 – 6%	7%	7%	8%

Required: Calculate Sarah’s employment benefit on the $250,000 loan, for 20x2.

Answer 1

For Calculation of employee benefit of sarah for 20x2.

For 1st quarter :-

effective benefit of interest rate

6% - 3% = 3%

benefit of first quarter $250000*3% = $7500

for 3 months $7500*3/12 = $1875

For 2st quarter :-

effective benefit of interest rate

7% - 3% = 4%

benefit of first quarter $250000*4% = $10000

for 3 months $10000*3/12 = $2500

For 3st quarter :-

effective benefit of interest rate

7% - 3% = 4%

benefit of first quarter $250000*4% = $10000

for 3 months $10000*3/12 = $2500

For 3st quarter :-

effective benefit of interest rate

8% - 3% = 5%

benefit of first quarter $250000*5% = $12500

for 3 months $12500*3/12 = $3125

Total Sarah’s employment benefit on the $250,000 loan :-

$1875 + $2500 + $2500 + $3125 = $10000