Desrocher Ltd. issued an instalment note on January 1, 2014 (with a required yield of 9%), in exchange for land that it purchased from Safayeni Ltd. Safayeni's real estate agent had listed the land on the market for $120,000. The note calls for three equal blended payments of $43,456 that are to be made at December 31, 2014, 2015, and 2016.
A)Prepare an effective-interest amortization table for the instalment note for the three-year period.
To prepare an effective-interest amortization table for the instalment note, we first need to calculate the present value of the three equal blended payments. We can use the formula for calculating the present value of an annuity to do this.
Step 1: Calculate the present value of the annuity:
PV = PMT x [(1 - (1 + r)^(-n)) / r]
Where:
PV = Present Value
PMT = Payment amount
r = Required annual yield
n = Number of periods
Given:
PMT = $43,456
r = 9% or 0.09
n = 3 (number of payments)
Substituting the values into the formula, we get:
PV = $43,456 x [(1 - (1 + 0.09)^(-3)) / 0.09]
= $43,456 x [(1 - (1.09)^(-3)) / 0.09]
= $43,456 x [0.163062]
PV = $7,077.24
Step 2: Prepare the amortization table for the three-year period:
Year | Beginning Balance | Interest Expense | Principal Repayment | Ending Balance
-----------------------------------------------------------------------------------------
2014 | $7,077.24 | $635.95 | $42,820.29 | $6,256.95
2015 | $6,256.95 | $563.13 | $42,893.11 | $1,363.84
2016 | $1,363.84 | $122.74 | $42,893.11 | $0.00
To calculate the interest expense and principal repayment for each year:
Interest Expense = Beginning Balance x Yield Rate
Principal Repayment = Payment Amount - Interest Expense
Ending Balance = Beginning Balance - Principal Repayment
Please note that the amounts are rounded to the nearest dollar for simplicity.
Based on the calculations, the effective-interest amortization table for the instalment note for the three-year period would look as shown above.
To prepare an effective-interest amortization table for the instalment note, we need to calculate the interest expense and the principal payment for each period.
1. Calculate the total principal amount of the note:
The total principal amount of the note is the market value of the land, which is $120,000.
2. Calculate the annual interest expense:
The required yield for the instalment note is 9%, which means the annual interest rate is 9%.
The annual interest expense can be calculated by multiplying the outstanding principal balance at the beginning of each year by the annual interest rate.
Year 1:
Principal at the beginning = $120,000
Interest expense = Principal at the beginning * Annual interest rate = $120,000 * 9% = $10,800
Year 2:
Principal at the beginning = Principal at the beginning - principal payment in Year 1 = $120,000 - $43,456 = $76,544
Interest expense = Principal at the beginning * Annual interest rate = $76,544 * 9% = $6,889.96
Year 3:
Principal at the beginning = Principal at the beginning - principal payment in Year 2 = $76,544 - $43,456 = $33,088
Interest expense = Principal at the beginning * Annual interest rate = $33,088 * 9% = $2,977.92
3. Calculate the principal payment for each period:
The principal payment for each period is calculated by dividing the total principal amount by the number of payments.
Principal payment = Total principal amount / Number of payments = $120,000 / 3 = $40,000
4. Calculate the total payment for each period:
The total payment for each period is the sum of the interest expense and the principal payment.
Year 1:
Total payment = Interest expense + Principal payment = $10,800 + $40,000 = $50,800
Year 2:
Total payment = Interest expense + Principal payment = $6,889.96 + $40,000 = $46,889.96
Year 3:
Total payment = Interest expense + Principal payment = $2,977.92 + $40,000 = $42,977.92
Now, with the above information, you can prepare the effective-interest amortization table for the instalment note for the three-year period. The table will show the beginning balance, interest expense, principal payment, and ending balance for each year.