Question

This is a new problem with new numbers, start the problem over. A company bought a piece of equipment at the beginning of the year (January 1, 20X1) by signing the following note payable. The note is due at maturity and interest is due annually. Face value 260,000 Coupon rate 3.00% Market rate 7.40% Term 4 What is the ending balance of the note at the end of year 3?

Answer 1

Answer: $249,347

Calculations:

i. Present value of the notes:

Cash interest = $260,000 x 3% = $7,800

Present value of the interest payments	$26,183
[$7,800 x 3.35685 PV annuity factor at 7.4% for 4 years]
Present value of the face value	$195,413
[$260,000 x 0.75159 PV factor at 7.4% for 4 years]
Present value of the notes payable	$221,597

ii. Amortization Schedule:

Amortization Schedule
Year	Cash interest	Interest expense	Discount amortized	Carrying value of the notes
				$221,597
1	$7,800	$16,398	$8,598	$230,195
2	$7,800	$17,034	$9,234	$239,430
3	$7,800	$17,718	$9,918	$249,347
4	$7,800	$18,453	$10,653	$260,000

• Interest expense = Preceding carrying value x 7.4%
• Discount amortized = Interest expense - Cash interest
• Carrying value of the notes = Preceding carrying value + Discount amortized

Therefore, The ending balance of the note at the end of year 3 is $249,347