DETERMINATION OF EQUAL ANNUAL PAYMENTS
Equal annual payments = Principal ÷ Present value annuity factor (4 Years, 5%)
= 14,000/3.54595050416236
= $3948.16
.
Verification:
End of Year | Payment | Interest | Principal Repayment | Outstanding Balance |
0 | 3948.16 | 14000 | ||
1 | 3948.16 | 700 | 3248.16 | 10751.84 |
2 | 3948.16 | 537.59 | 3410.57 | 7341.27 |
3 | 3948.16 | 367.06 | 3581.1 | 3760.17 |
4 | 3948.16 | 188 | 3760.16 | 0 |
(i) interest is calculated on Outstanding balance:
1st year interest = $14,000 x 5% = 700, 2nd year interest = 10751.84 x 5% = 537.59, 3rd year interest = 7341.27 x 5 % = 367.06 and 4th year interest = 3760.17 x 5% = 188
(ii) Principal repayment = Payment - Interest
(iii) Outstanding balance = Previous Year's Outstanding balance - Principal repayment
Year | Opening balance | Principal repayment | Outstanding Balance |
1 | 14000 | 3248.16 | 10751.84 |
2 | 10751.84 | 3410.57 | 7341.27 |
3 | 7341.27 | 3581.1 | 3760.17 |
4 | 3760.17 | 3760.16 | 0 |
SUMMARIZE JOHN'S FINANCIAL POSITION IN BULLET OUTLINE FORMAT
- BORROWS: $14,000
- ASSETS (Cash): $14,000
Note:
1.Bertha borrows's from John's brother do not include in the financial statements of John.
2. The value of 'Present value annuity factor (4 Years, 5%)' taken from present value Table. you can also calculate as follows
Year | Calculation | Value |
1 | 1/(1+0.05)1 | 0.952380952 |
2 | 1/(1+0.05)2 | 0.907029478 |
3 | 1/(1+0.05)3 | 0.863837599 |
4 | 1/(1+0.05)4 | 0.822702475 |
Annuity factor | 3.545950504 |
JOHN BORROWS $14000 FROM THE SAVINGS AND LOAN AT A COMPOUND INTEREST RATE OF 5%/YR. HE...
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