Dan Dayle started a business by issuing an $88,000 face value note to First State Bank on January 1, 2016.

Dan Dayle started a business by issuing an $88,000 face value note to First State Bank on January 1, 2016. The note had an 6 percent annual rate of interest and a five-year term. Payments of $20,891 are to be made each December 31 for five years.

Required
a.    What portion of the December 31, 2016, payment is applied to interest expense and principal?

Explanation:

Dayle COMPANY Amortization Schedule $88,000, 5-Yr. Term Note, 6% Interest Rate
Year	Prin. Bal. on Jan. 1			Cash Pay. Dec. 31			Applied to Interest			Applied to Principal			Prin. Bal. End of Period
2016		$ 88,000			$ 20,891			$ 5,280			$ 15,611			$ 72,389
2017		72,389			20,891			4,343			16,548			55,841
2018		55,841			20,891			3,350			17,541			38,300
2019		38,300			20,891			2,298			18,593			19,707
2020		19,707			20,891			1,184			19,707			0

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On January 1, 2016, Beatie Co. borrowed $370,000 cash from Central Bank by issuing a five-year, 8 percent note. The principal and interest are to be paid by making annual payments in the amount of $92,669.

On January 1, 2016, Beatie Co. borrowed $370,000 cash from Central Bank by issuing a five-year, 8 percent note. The principal and interest are to be paid by making annual payments in the amount of $92,669. Payments are to be made December 31 of each year, beginning December 31, 2016.

Required
Prepare an amortization schedule for the interest and principal payments for the five-year period. (Round your answers to the nearest dollar amount.)


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Sanders Co. is planning to finance an expansion of its operations by borrowing $54,100. City Bank has agreed to loan Sanders the funds.

Sanders Co. is planning to finance an expansion of its operations by borrowing $54,100. City Bank has agreed to loan Sanders the funds. Sanders has two repayment options: (1) to issue a note with the principal due in 10 years and with interest payable annually or (2) to issue a note to repay  $5,410 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 9.5 percent for each option.


Required
a.    What amount of interest will Sanders pay in year 1 under option 1 and under option 2?

Explanation:

a.

Year 1:

Option 1 − annual interest only:

$54,100 × 9.5% = $5,140

   

Option 2 − annual interest and $5,410 on principal:

$54,100 × 9.5% = $5,140

   

Note: The amount of interest paid in year 1 is the same under both options because no payment was made on the principal until the end of the year under option two.

b.

Year 2:

Option 1 − annual interest only:

$54,100 × 9.5% = $5,140

   

Option 2 − annual interest and $5,410 on principal:

  

Original principal:	$	54,100
Less: Payment at end of year one		(5,410	)
Balance of principal for year two	$	48,690

   

$48,690 × 9.5% = $4,626

Note: Under option two, less interest will be paid in year two and in future years because the amount subject to interest is less.

c.

Under option one, only annual interest is paid. This is a desirable option if a company expects cash flow problems in the early years. More interest will be paid, but less cash is required in the short term. Option two is more advantageous if the business has enough cash to pay both principal and interest each year. This option is less costly.

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