Question

1. Note with unreasonable terms (funny money)

E Company purchased a truck for an agreed price of $135,000 on January 1, 2018,   D Company paid $30,000 down and financed the balance with the dealer at an annual interest rate of 1/2%. Payments were due each quarter end, for 12 quarters, starting March 31, 2018.

It is clear that the truck could have been purchased for $125,000 cash.

Calculate the required payment under the note signed. Calculate the effective interest rate, as implied by the cash price of the truck. Prepare an amortization table for both the legal note and the note with true effective interest.

Make the entry needed on December 31, 2018

Assume that, after interest is paid on December 31, 2018, the loan is paid off and retired. Prepare the needed entry.

Answer 1

Repayment schedule
Period	Amount Outstanding	interest @1/8%	amount paid	closing balance
1	135,000	-	30,000	105,000
2	105,000	131	8,881	96,250
3	96,250	120	8,870	87,500
4	87,500	109	8,859	78,750
5	78,750	98	8,848	70,000
6	70,000	88	8,838	61,250
7	61,250	77	8,827	52,500
8	52,500	66	8,816	43,750
9	43,750	55	8,805	35,000
10	35,000	44	8,794	26,250
11	26,250	33	8,783	17,500
12	17,500	22	8,772	8,750
13	8,750	11	8,761	-
Effective interest rate with cash price
Period	Amount Outstanding	interest @1.71%	amount paid	closing balance
1	125,000	-	30,000	95,000
2	95,000	1,625	8,881	87,743
3	87,743	1,500	8,870	80,373
4	80,373	1,374	8,859	72,888
5	72,888	1,246	8,848	65,286
6	65,286	1,116	8,838	57,565
7	57,565	984	8,827	49,723
8	49,723	850	8,816	41,758
9	41,758	714	8,805	33,667
10	33,667	576	8,794	25,449
11	25,449	435	8,783	17,101
12	17,101	292	8,772	8,622
13	8,622	147	8,761	8
	Effective interest rate	6.84
31-03-18	Interest on loan	98
	Loan a/c	8750
	bank		8848
31-03-18	Loan a/c	70000
	bank		70000