Question

A company with a fiscal year ending on December 31 borrowed money with an installment loan of $500,000 on January 1, 2017. The loan agreement requires the company to make five equal annual payments that will fully amortize the loan in exactly five years. The first payment on the loan was made December 31, 2017 and the annual interest rate associated with the loan was 8 percent. The impact of this loan (including both the original proceeds and the annual payment) on cash flows from financing reflected in the 2017 Statement of Cash Flows would be: Multiple Choice $500,000 inflow from financing activities. $414,772 inflow from financing activities. $374,772 inflow from financing activities.

Answer 1

Annual Loan Payment = [P x R x (1+R)^N]/[(1+R)^N-1]
Where,
P= Loan Amount
R= Interest rate per period
N= Number of periods
= [ $500000x0.08 x (1+0.08)^5]/[(1+0.08)^5 -1]
= [ $40000( 1.08 )^5] / [(1.08 )^5 -1
=$125228.23
Interest for loan =$500000*0.08 =$40000
Repayment of principal = $125228-40000
=$85228
Cash inflow from financing activities				$       500,000
Less:
Cash outflow from financing activities				$          85,228
Net cash inflow from financing activities				$       414,772
Correct Opption : $414,772 inflow from financing activities