Question

Dear Expart,

Please teach me the following questions:

On February 1, Willmar Corporation borrowed $100,000 from its bank by signing a 12 percent,15year note payable. The note calls for180 monthly payments of $1,470. Each paymentincludes an interest and a principal component.
a. Compute the interest expense in February.
b. Compute the portion of Willmar's March 31 paymentthat will be applied to the principal ofthe
note.(Round yourintermediate calculations and final answerto the nearest dollar amount.)
c. Compute the carrying value ofthe note on April 30.(Round yourintermediate calculations
and final answerto the nearest dollar amount.)

Answer 1

Solution:

Wilmar Corporation

1. Computation of interest expense for February:

February interest expense = principal x interest rate x period of interest

Principal = $100,000

Rate of interest = 12% p. a

Period = 1 month (February)

Interest expense for February = $100,000 x 12% x 1/12 = $1,000

1. Computation of the company’s portion of the March 31 payment that will be applied to the principal of the note:

As calculated above, interest expense for February = $1,000

monthly payment = $1,470

interest portion = $1,000

principal portion = $1,470 - $1,000 = $470

Outstanding principal for March= 100,000 – 470 = $99,530

Interest expense for March = $99,530 x 12% x 1/12 = $995.30

Monthly payment = $1,470

Interest portion = $995 (rounded off to nearest whole dollar)

Principal portion = $1,470 - $995 = $475

Hence, principal portion of the March 31 payment = $475

1. Computation of the carrying value of the note on April 30:

Outstanding principal for April 1 = 100,000 – 470 – 475 = $99,055

Interest expense = 99,055 x 12% x 1/12 = $991

Principal portion of monthly payment is computed as follows,

Monthly payment – interest expense = 1,470 – 991 = $479

Hence, principal portion of monthly payment for April = $479

Carrying value of principal as on April 30 = $99,055 - $479 = $98,576