Suppose a dairy farmer obtained a $100,000 loan to buy creamery equipment on June 1, 2016....

Suppose a dairy farmer obtained a $100,000 loan to buy creamery equipment on June 1, 2016. There was no down payment, and the loan is payable over 5 years in equal payments of $20,000 due on June 1st each year (first payment June 1, 2017), with the remaining balance due at the end of the loan term. The annual interest rate is 5%.

Businesses often need to compute the amount of accrued interest payable as of the date of a financial statement, such as a balance sheet. Approximately how much accrued interest would this loan contribute to the dairy farmer’s year-end balance sheet for 2016?

Solutions

Expert Solution

Loan amount = 100,000; annual interest rate = 5% (no compounding mentioned in question)

The loan has accrued interest for 7 months (June 1, 2016 to December 31, 2016) as of year end 2016.

Hence, accrued interest as of year end = 5% * 100000 * 7 / 12 = 5000 * 7 / 12 = $2,916.67

jeff jeffy answered 1 year ago

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