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lidiya [134]
2 years ago
14

The discount method is a method for computing interest on an installment loan. With the discount method, you calculate the inter

est based on a discount rate that is multiplied times the amount borrowed and by the number of years to repay the loan. The interest is then subtracted from the amount of the loan, and only the difference is given to the borrower. Thus, the interest is paid up front. For loans using the discount method, the monthly payment amount is calculated based on the entire loan amount, including the discounted interest.
Consider the following example:

Deshi Chen from Boise, Idaho, borrows $3,500 (including interest) for three years (36 months) at an interest rate of 5% per year. The loan uses the discount method for determining the amount of interest.

Required:
a. How much of the loan amount ($3,500) consists of interest?
b. How much of the loan is actually given directly to Jack?
c. What is the monthly payment (rounded to the nearest penny), assuming 36 monthly payments?
Business
1 answer:
Tcecarenko [31]2 years ago
8 0

Answer:

a. The amount of the loan that is consist of interest is $525.

b. The amount of the loan that is actually given directly to Jack is $2,975.

c. The monthly payment (rounded to the nearest penny), assuming 36 monthly payments is $97.22.

Explanation:

a. How much of the loan amount ($3,500) consists of interest?

Interest = Discount rate * Amount borrowed * Number of years to repay the loan =

Where;

Discount rate = interest rate  = 5%

Amount borrowed = $3,500

Number of years to repay the loan = 3

Substituting the values into equation (1), we have:

Interest = 5% * $3,500 * 3

Interest = $525

Therefore, the amount of the loan that is consist of interest is $525.

b. How much of the loan is actually given directly to Jack?

Amount given to Jack = Amount borrowed - Interest = $3,500 - $525 = $2,975

Therefore, the amount of the loan that is actually given directly to Jack is $2,975.

c. What is the monthly payment (rounded to the nearest penny), assuming 36 monthly payments?

Monthly payment = Amount borrowed / Number of months = $3,500 / 36 = 97.2222222222222

Rounding to the nearest penny, we have:

Monthly payment = $97.22

Therefore, the monthly payment (rounded to the nearest penny), assuming 36 monthly payments is $97.22.

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On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012:

                                          Book  Value        Fair Value

Current assets                      $120,000          $120,000

Land                                           72,000           192,000

Building (20yr life)                  240,000           268,000

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Additional Paid-in Capital       384,000

Retained Earnings                   216,000

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year.

In Cale's accounting records, what amount would appear on December 31, 2012 for equity in subsidiary earnings?

A) $ 77,000.

B) $ 79,000.

C) $125,000.

D) $127,000.

E) $ 81,800.

The explanation of the answer is now provided as follows:

Total amortization of allocations for 2012 = ((Building fair value – Building book value) / 20 year) + ((Equipment fair value - Equipment book value) / 10 years) = (($268,000 - $240,000) / 20) + (($516,000 - $540,000) / 10) = -$1,000

Amount for equity in subsidiary earnings on December 31, 2012 = Kaltop earned net income for 2012 - Total amortization of allocations for 2012 = $126,000 - (-$1,000) = $126,000 + $1,000 = $127,000

The amount that would appear on December 31, 2012 for equity in subsidiary earnings is $127,000. Therefore, the correct option is D) $127,000.

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