Question

Beta purchased a computer at a cost of $ 75,000. To finance the purchase, he signed a five-year promissory note, which requires five equal annual payments. Beta will make the first payment in a year. Each payment will be in the amount of $ 20,293.

a. Determine the interest rate on this note.

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

c. Suppose that immediately after making the second payment, Beta refinances and signs a new three-year note for the amount owed on the first note and the interest rate is 9%, how much will be the annual payment on the new note.

Answer 1

a]	The amount of the note is the PV of the five EOY payments.
	Hence, 75000 = 20293*PVIFA(r,5), where r = interet rate on the note.
	Solving for r:
	PVIFA(r,5) = 75000/20293 =	3.6959
	From the annuity factor tables, for n = 5,
	3.6959 corresponds to the interest rate of 11%.
	Hence, rate of interest on the note =	11.00%
b]	Entry for the first payment at EOY 1:
	Interest expense [75000*11%]	$            8,250
	Notes payable	$          12,043
	Cash		$          20,293
	Entry for the last payment at EOY 5:
	Interest expense [20293*11%/111%]	$            2,011
	Notes payable	$          18,282
	Cash		$          20,293
c]	Carrying value of notes payable at EOY 2 [per table below]	$          49,589
	The amortization table is given below:
	Year	Beg. Bal [Carrying value]	Interest at 11%	Installment	Payment towards principal
	1	$          75,000	$             8,250	$          20,293	$            12,043
	2	$          62,957	$             6,925	$          20,293	$            13,368
	3	$          49,589	$             5,455	$          20,293	$            14,838
	4	$          34,751	$             3,823	$          20,293	$            16,470
	5	$          18,281	$             2,011	$          20,292	$            18,281
	Annual payment on the new note = 49589*0.09*1.09^3/(1.09^3-1) =	$          19,590