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Lecture 12

BUS 320 Lecture Notes - Lecture 12: Amortization Schedule, Financial Statement, Income Statement


Department
Business Administration
Course Code
BUS 320
Professor
Dennis Chung
Lecture
12

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© Dennis Chung 2016 Do not distribute
BUS320
Assignment #3
QUESTION ONE
Part (a)
The Stone Warehouse Furniture Store
stated interest rate of note = 0%
market interest rate = 14%
life of note = 5 years
face value of note = $40,000
+$40,000
12/15/20X1 12/15/20X2 12/15/20X3 12/15/20X4 12/15/20X5 12/15/20X6
(i) Present value of the note on December 15, 20X1
use financial calculator, FV= 40000, I=14, N=5, COMP PV=?
should get PV = $20,775
(ii) Amortization schedule
12-month
period
ending
Carrying
Amount
of note,
Beg. of period
(1)
Interest
Income
(Effective
Interest
Method)
(2)=(1) x 14%
Cash
Received
At end of
period
(3)
Principal
portion
(4)=(3)-(2)
Carrying
Amount
of note,
End of period
(5)=(1)-(4)
12/15/20X2 20,775 2,909 0 -2,909 23,684
12/15/20X3 23,684 3,316 0 -3,316 27,000
12/15/20X4 27,000 3,780 0 -3,780 30,780
12/15/20X5 30,780 4,309 0 -4,309 35,089
12/15/20X6 35,089 4,911 0 -4,911 40,000
Also equally acceptable approach is treating the principal payment (i.e., the $40,000, same as face
amount of the note) at the maturity date as part of the last payment in the amortization table (i.e.,
combined with the regular interest payment which in this case happens to be zero because of the
non-interest bearing nature of the note):
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© Dennis Chung 2016 Do not distribute
12-month
period
ending
Carrying
Amount
of note,
Beg. of period
(1)
Interest
Income
(Effective
Interest
Method)
(2)=(1) x 14%
Cash
Received
At end of
period
(3)
Principal
portion
(4)=(3)-(2)
Carrying
Amount
of note,
End of period
(5)=(1)-(4)
12/15/20X2 20,775 2,909 0 -2,909 23,684
12/15/20X3 23,684 3,316 0 -3,316 27,000
12/15/20X4 27,000 3,780 0 -3,780 30,780
12/15/20X5 30,780 4,309 0 -4,309 35,089
12/15/20X6 35,089 4,911 40,000 35,089 0
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