Question

On June 1, 2020, Whispering Winds Corporation approached Silverman Corporation about buying a parcel of undeveloped land. Silverman was asking $258,000 for the land and Whispering Winds saw that there was some flexibility in the asking price. Whispering Winds did not have enough money to make a cash offer to Silverman and proposed to give, in return for the land, a $315,000, five-year promissory note that bears interest at the rate of 5%. The interest is to be paid annually to Silverman Corporation on June 1 of each of the next five years. Silverman insisted that the note taken in return become a mortgage note. Silverman accepted the amended offer, and Whispering Winds signed a mortgage note for $315,000 due June 1, 2025. Whispering Winds would have had to pay 10% at its local bank if it were to borrow the cash for the land purchase. Silverman, on the other hand, could borrow the funds at 9%. Both Whispering Winds and Silverman have calendar year ends.

1.

Assume that Silverman hed insisted on obtaining an instalment note from Whispering Winds instead of a mortgage note. Using (1) factor tables. (2) a financial calculator, or (3) Excel function PMT, calculate the amount of the instalment payments that would be required for a five-year instalment note (Hint: Refer to Chapter 3 for tips on calculating.) Use the same cost of the land to Whispering Winds Corporation that you determined for the mortgage note in a previous part of the question. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to decimal places, eg. 5,275.) Amount of the instalment S

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Answer 1

Please refer the following image for the solution:  

Answer 1 Answer 2 Effective ammortization table Installment Note Payable Amt of Installment $72,757 Loan Amt (P) Loan Term (n) Rate of interest (r) $315,000 5 years 5% Cash paid Interest Expense Discount Amortized Note Carrying amount (A) @ 5% (B = D*5%) (C = A-B) (D = previous D-C) $315,000 $72,757 $15,750 $57,007 $257,993 $72,757 $12,900 $59,857 $198,136 $72,757 $9,907 $62,8501 $135,285 $72,757 $6,764 $65,993 $69,292 $72,757 $3,465 $69,292 $0 $363,785 $48,785 $315,000 Installment p*r* (1+r)" (1+r)n-1 $315,000 * 5% % (1+0.05)5 (1+0.05)5-1 $72,757 An r3 Date Account Title and Explanation June 1 2020 Land Promissory Note @ 5% Debit Credit $315,000 $315,000 (To record purchase of land and issuance of installment note) Answer 4 Date Account Title and Explanation June 1 2021 Promissory Note @ 5% Interest expense Bank Debit Credit $57,007 $15,750 $72,757