Question

Problem 6-55 Amortization with Equal Payments [LO3]

Prepare an amortization schedule for a five-year loan of $61,000. The interest rate is 8 percent per year, and the loan calls for equal annual payments. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Leave no cells blank - be certain to enter "0" wherever required.)

  

Year	Beginning Balance	Total Payment	Interest Payment	Principal Payment	Ending Balance
1	$	$	$	$	$
2
3
4
5

How much interest is paid in the third year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Interest paid

$

How much total interest is paid over the life of the loan? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Total interest paid

$

Answer 1

First we need to find equal annual payment of loan,

Loan = 61000, Annual rate = 8% , no of years = 5

We can find the equal annual payment of loan using PMT function in excel

Formula to be used in excel: +PMT(rate,nper,-pmt)

Using PMT function in excel, we get equal annual payment of loan = $15277.8437

Creating Amortization schedule

For year 1 Loan = Beginning balance = 61000, Interest = interest rate x beginning balance = 8% x 61000 = 4880, Principal payment = Equal annual payment - interest = 15277.8437 - 4880 = 10397.8437 = 10397.84, Ending balance = Beginning balance - Principal = 61000 - 10397.84 = 50602.1563 = 50602.16

Using above formula we get

For year 2 , Beginning balance = Ending balance of year 1 = 50602.1563, Interest = 50602.1563 x 8% = 4048.1725 = 4048.17, Principal = 11229.6712 = 11229.67, Ending balance = 50602.1563 - 11229.6712 = 39372.4851 =39372.49

Similarly we can find the values for other three years and round our values to two decimal places. Now we get following Amortization schedule

Year	Beginning Balance	Total payment	Interest Payment	Principal Payment	Ending Balance
1	61000.00	15277.84	4880.00	10397.84	50602.16
2	50602.16	15277.84	4048.17	11229.67	39372.49
3	39372.49	15277.84	3149.80	12128.04	27244.44
4	27244.44	15277.84	2179.56	13098.29	14146.15
5	14146.15	15277.84	1131.69	14146.15	0.00

From Amortization schedule we get interest paid in year 3 = 3149.80

Hence interest paid in third year = 3149.80

Total payment over 5 years = Equal annual payment x no of payments = 76389.2185

Total interest paid over life of loan = Total payment over 5 years - loan = 76389.2185 - 61000 = 15389.2185 = 15389.22 (rounded to two decimal places)

Hence Total interest paid over life of loan = 15389.22