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14 August, 21:55

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 annual payments of $14,903 at the end of each year. The principal balance of the note on January 1, Year 2 is (round your answer to the nearest whole dollar).

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  1. 15 August, 00:22
    0
    The multiple choices are as follows:

    a. $100,000

    b. $92,000

    c. $93,097

    d. $96,903

    The correct option is C,$93,097

    Explanation:

    The principal balance of the note on January 1 year 2 is computed by first of all adding the first year interest to principal amount of $100,000 then deducting the annual principal and interest repayment of $14,903.

    Find the computation below:

    Opening balance of the note in year 2=$100,000 + ($100,000*8%) - $14,903

    =$100,000+$8,000-$14,903

    =$93,097

    The opening balance in year 2 is $93,097

    Option A is wrong because $100,000 was initial amount of the note. hence no repayment and interest have been considered.

    Option B is also incorrect because $92,000 means $100,000 minus the interest on the note, whereas the interest should have been added.
  2. 15 August, 01:22
    0
    Year 1 $93,097

    Year 2 $85,642

    Explanation:

    Note Principal value = $100,000

    Annual payment = $14,903

    Interest of years 1 = $100,000 x 8% = $8,000

    Principal payment in first year 1 = $14,903 - $8,000 = $6,903

    Principal balance of note = $100,000 - $6,903 = $93,097

    Interest of years 2 = $93,097 x 8% = $7,448

    Principal payment in first year 1 = $14,903 - $7,448 = $7,455

    Principal balance of note = $93,097 - $7,455 = $85,642
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