Luke Company sold some machinery to View Company on January 1, 2017, for which the cash selling price was $758,200. View entered into an installment sales contract with Lake at a 10% interest rate. The contract required payments of $200,000 a year over five years with the first payment due on December 31, 2017. Required:Prepare an amortization schedule that shows what portion of each $200,000 payment will be shown as interest income over the period 2017-2021.

Question
Asked Nov 4, 2019

Luke Company sold some machinery to View Company on January 1, 2017, for which the cash selling price was $758,200. View entered into an installment sales contract with Lake at a 10% interest rate. The contract required payments of $200,000 a year over five years with the first payment due on December 31, 2017. 

Required:

Prepare an amortization schedule that shows what portion of each $200,000 payment will be shown as interest income over the period 2017-2021. 

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Step 1

Meaning of Amortization:

Amortization is the process in which the amount paid in the installment of the loan is fixed is referred to as amortization process. In this process the total amount paid remains same in each period but principal amount and interest amount differs in each year.

The amount of interest is computed on the net installment due. The principal amount to be paid in each period is computed by deducting the interest amount from total payments.

Step 2

The rate of interest is 10%. The total installment due is $758,200. The payment to be made are $200,000...

Schedule of Amortization
(b)
(a)
Раyments
(a-b)
Date
Interest Income
Reduction
Net Installments Due
of
Principal
$758,200
($758, 200 $124,180)
($758, 200 x 10%
$200,000
$124,180
31-12-2017
=$75,820
= $634,020
($634, 020 x10%)
$63,402
($634, 020-$136,598)
= $497,422
31-12-2018
$200,000
$136,598
($497,422 x10%
($497,422-$150,258)
31-12-2019 $200,000
$150,258
= $49,742
$347,164
31-12-2020 $200,000
($347,164x10%)
(S347,164 $165,284)
$181,880
$165,284
$34,716
($200, 000-$181,880)
=$18,120
31-12-2021
$200,000
$181,880
Nil
$1,000,000
$241,800
$1,660,486
$758,200
Total
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Schedule of Amortization (b) (a) Раyments (a-b) Date Interest Income Reduction Net Installments Due of Principal $758,200 ($758, 200 $124,180) ($758, 200 x 10% $200,000 $124,180 31-12-2017 =$75,820 = $634,020 ($634, 020 x10%) $63,402 ($634, 020-$136,598) = $497,422 31-12-2018 $200,000 $136,598 ($497,422 x10% ($497,422-$150,258) 31-12-2019 $200,000 $150,258 = $49,742 $347,164 31-12-2020 $200,000 ($347,164x10%) (S347,164 $165,284) $181,880 $165,284 $34,716 ($200, 000-$181,880) =$18,120 31-12-2021 $200,000 $181,880 Nil $1,000,000 $241,800 $1,660,486 $758,200 Total

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