Exercise 10-1A Interest only versus an installment note

Accounting for Long-Term Debt

Exercise 10-1A Interest only versus an installment note

Sanders Co. is planning to finance an expansion of its operations by borrowing $150,000. 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 $15,000 of the principal each year along with the annual interest based on the unpaid principal balance. Assume the interest rate is 8 percent for each option.

Required
a. What amount of interest will Sanders pay in Year 1?
(1) Under option 1?
(2) Under option 2?

b. What amount of interest will Sanders pay in Year 2?
(1) Under option 1?
(2) Under option 2?

c. Explain the advantage of each option.

Exercise 10-2A Amortization schedule for an installment note

On January 1, Year 1, Beatie Co. borrowed $200,000 cash from Central Bank by issuing a five-year, 6 percent note. The principal and interest are to be paid by making annual payments in the amount of $47,479. Payments are to be made December 31 of each year, beginning December 31, Year 1.

Required
Prepare an amortization schedule for the interest and principal payments for the five-year period.

Exercise 10-3A Financial statement effects of an installment note

Dan Dayle started a business by issuing an $80,000 face-value note to First State Bank on January 1, Year 1. The note had an 8 percent annual rate of interest and a five-year term. Payments of $20,037 are to be made each December 31 for five years.

Required
a. What portion of the December 31, Year 1, payment is applied to
(1) Interest expense?
(2) Principal?

b. What is the principal balance on January 1, Year 2?

c. What portion of the December 31, Year 2, payment is applied to
(1) Interest expense?
(2) Principal?

Exercise 10-4A Financial statement effects of an installment note

A partial amortization schedule for a 10-year note payable issued on January 1, Year 1, is shown next:

Required
a. Using a financial statements model like the one shown next, record the appropriate amounts for the following two events:
(1) January 1, Year 1, issue of the note payable.
(2) December 31, Year 1, payment on the note payable.

b. If the company earned $62,000 cash revenue and paid $45,000 in cash expenses in addition to the interest in Year 1, what is the amount of each of the following?
(1) Net income for Year 1.
(2) Cash flow from operating activities for Year 1.
(3) Cash flow from financing activities for Year 1.

c. What is the amount of interest expense on this loan for Year 4?