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In: Accounting

Joe borrowed $20,000 from Buddy Bank by issuing a 10% three-year note. Joe agreed to repay...

Joe borrowed $20,000 from Buddy Bank by issuing a 10% three-year note. Joe agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, what is the amount of the interest expense associated with the second payment? (Round your answer to the nearest dollar.)

Solutions

Expert Solution

EAI :
EAI or Instalment is sum of money due as one of several equal payments for loan/ Mortgage taken today, spread over an agreed period of time.

EAI = Loan / PVAF (r%, n)
PVAF = SUm [ PVF(r%, n) ]
PVF(r%, n) = 1 / ( 1 + r)^n
r = Int rate per anum
n = No. of years

How to calculate PVAF using Excel:
=PV(Rate,NPER,-1)
Rate = Disc Rate
NPER = No.of periods

Annual Instalemnt = Loan Amount / PVAF (r%, n)
Where r is Int rate per Anum & n is No. of Years
= $ 20000 / PVAF (0.1 , 3)
= $ 20000 / 2.4869
= $ 8042.3

Loan Amortization Schedule:

From Amortization schedule, Int in second payment is $ 1395.77

Opening Balance = Previous month closing balance
EAI = Instalment calculated
Int = Opening Balance * Int Rate
Principal repay = Instalment - Int
Closing Balance = Opening balance - Principal Repay

ekkarill92 answered 2 years ago
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