Question

HQ Ltd. purchased a used truck from Trans Auto Sales Inc. HQ paid a $4,600 down payment and signed a note that calls for 36 payments of $1,035.00 at the end of each month. The stated rate of interest in the note is 3%. As an incentive for entering into the contract, Trans has agreed to forgive the first two payments under the lease.

What was the purchase price of the used truck excluding the incentive given?

Calculate the present value of the 34 payments of $1,035.00 that will be made by HQ for payments 3 to 36 inclusive. You will need to perform two steps.

1. Calculate the present value of the 34 payments as of the end of the second month following the purchase of the used truck.

2. Take the result from the first calculation and calculate the present value as of the date of purchase.

What amount should HQ use to record the purchase of the truck?

What amount of interest should be accrued at the end of the first month following the purchase?

Answer 1

	Rate	Monthly Interest Rate=(3/12)%	0.25%
	Nper	Number of Payments	34
	Pmt	Monthly payment	$1,035.00
	PV	Value of Payments at end of Month 2	$33,695.58	(Using PV function of excel with Rate=0.25%,Nper=34,Pmt=-1035)
	Fv	Value of Payments at end of Month 2	$33,695.58
	Rate	Monthly Interest Rate=(3/12)%	0.25%
	Nper	Number of months	2
	PV	Present value of Payments	$33,527.73	(Using PV function of excel with Rate=0.25%,Nper=2,Fv=-33695.58)
		Amount to be recorded for Purchase of truck	$33,527.73
		Interest accrued at the end of first month	$83.82	(33527.73*0.25%)
										Cupuudlu PUPIL Allyrimer Number Styles Cells G6 X fac =PV(G3, G4,-G5) E G H I J K L M N 2 0.25% 3 Rate 4 Nper 5 Pmt 6 PV Monthly Interest Rate=(3/12)% Number of Payments Monthly payment Value of Payments at end of Month 2 $1,035.00 $33,695.58 (Using PV function of excel with Rate=0.25%, Nper=34, Pmt--1035) 7 Clipboard a Font Font Alignment Number Styles Cells G11 - X =PV (G9,610,,-G8) E G H I J K L M N O 0.25% 2 3 Rate 4 Nper 5 Pmt 6 PV 34 Monthly Interest Rate=(3/12)% Number of Payments Monthly payment Value of Payments at end of Month 2 $1,035.00 $33,695.58 (Using PV function of excel with Rate=0.25%,Nper=34,Pmt=-1035) $33,695.58 0.25% 8 FV 9 Rate 10 Nper 11 PV 12 Value of Payments at end of Month 2 Monthly Interest Rate=(3/12)% Number of months Present value of Payments $33,527.73 (Using PV function of excel with Rate=0.25%,Nper=2,Fv=-33695.58)