Question

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 annual payments of $14,903 at the end of each year. The principal balance of the note on January 1, Year 2 is (round your answer to the nearest whole dollar).

Answer 1

Answer:

The multiple choices are as follows:

a. $100,000

b. $92,000

c. $93,097

d. $96,903

The correct option is C,$93,097

Explanation:

The principal balance of the note on January 1 year 2 is computed by first of all adding the first year interest to principal amount of $100,000 then deducting the annual principal and interest repayment of $14,903.

Find the computation below:

Opening balance of the note in year 2=$100,000+($100,000*8%)-$14,903

                                                               =$100,000+$8,000-$14,903

                                                               =$93,097

The opening balance in year 2 is $93,097

Option A is wrong because $100,000 was initial amount of the note.hence no repayment and interest have been considered.

Option B is also incorrect because $92,000 means $100,000 minus the interest on the note,whereas the interest should have been added.

Answer 2

Answer:

Year 1 $93,097

Year 2 $85,642

Explanation:

Note Principal value = $100,000

Annual payment = $14,903

Interest of years 1 = $100,000 x 8% = $8,000

Principal payment in first year 1 = $14,903 - $8,000 = $6,903

Principal balance of note = $100,000 - $6,903 = $93,097

Interest of years 2 = $93,097 x 8% = $7,448

Principal payment in first year 1 = $14,903 - $7,448 = $7,455

Principal balance of note = $93,097 - $7,455 = $85,642