IV Special Interest Calculations
I. Special Interest
Calculations
A. Financing Deals
Fast
Freight Truck Company offers a truck to your client for $100,000 in exchange
for an installment note to be paid with 16 equal quarterly payments over 4
years at a 1% annual rate. There is a
required $10,000 down payment. Your research indicates that the normal
borrowing cost for the buyer is 5% annual.
1. Calculate the required
payment
2. Prepare the legal (1%)
amortization schedule provided by Fast Freight to your client, for the first
two quarters:
3. Record the purchase of the
truck by your client:
4. Prepare the effective interest amortization
schedule for the first two quarters that reflects the actual present value of
the loan:
5
Record the first quarter entry to record the first payment of principal and
interest.
6. Suppose that your client
pays off the loan right after making the second payment, record the entry.
B. Troubled Debt Restructuring
Ebco
has an unpaid bank loan for $40,000 on January 1, 2010. The original interest
rate was 7% annual. There is also $4,000 of unpaid, accrued interest. The bank
agrees to have Ebco transfer a piece of land with an agreed market value of
$10,000 in partial satisfaction of the loan. Ebco paid $12,000 for the land
last year. The bank then agrees to 4 annual payments of $9,100 due each Dec.
31, starting Dec. 31, 2010.
1. Record all the entries
concerning the land transfer and the restructuring on the books of Ebco on Jan.
1, 2010
2. Record the entry made by
Ebco for the first payment on Dec. 31, 2010.
3. Record the entry by the bank
to record the troubled debt restructuring.
