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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

You are purchasing a new car and plan to finance it through your employee credit union. The credit union has offered you two different promissory note plans, as follows:

Option 1: Three years at 6%, with interest payable annually.

Option 2: One year at 5%, renewable each year for up to three more years, at the then-current interest rate. Interest is payable at the end of each year.

Prepare a written report summarizing the advantages and disadvantages of each of these options.

To determine

Prepare a report summarizing the advantages and disadvantages of each of the options.

Explanation

Promissory note:

A promissory note is a written promise to make payment of certain sum at a particular future date.

The advantages and disadvantages of three-year note are as follows:

Advantages:

  • The interest rate of the note remains constant throughout three years and there is no much effect even if the interest rate increases.
  • The note is paid within three years, which means that the total amount of interest paid for this option is less than the option 2.

Disadvantages:

  • There is no benefit received, if the rate of interest increases.
  • The note is to be paid-off in three year, which provides least flexibility while compared to option 2...

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