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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Serial Installments; Amounts Applicable to Interest and Principal Ronald McDuffie purchases a new car at a cost of $14,400. He pays $3,000 down and issues an installment note payable by which he promises to pay the balance in 18 equal monthly installments, which include interest at an annual rate of 18% on the remaining unpaid balance at the beginning of each month starting with the first month after the purchase.

Required:

  1. 1. Compute the equal installment payments.
  2. 2. Compute the interest that will be paid for each of the first two periods. Indicate the amount of each payment that will be a reduction of principal.

1.

To determine

Determine the equal installment payments.

Explanation

Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.

Calculate present value of remaining obligation.

Present value of remaining obligation = Cost of new car - Downpayment=$14,400-$3,000=$11,400

Here, the first payment is not due until one month from the time of purchase; hence this is an ordinary annuity.

Now, calculate the equal installment payment.

Present valueO= Cash flow ×(POn=18,i=1.5%)$11,400=Cash flow×15

2.

To determine

Determine the amount of interest that will be paid for first 2 periods, also determine the amount of each payment that will be a reduction of principal.

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