Interest Revenue Question

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  • #194238
    Oimie
    Member

    On July 1, 20X3, Kern sold a parcel of land to Barr Co. for $400,000 under an installment sale contract. Barr made a $120,000 cash down payment on July 1, 20X3, and signed a 4-year 10% note for the $280,000 balance. The equal annual payments of principal and interest on the note will be $88,332 payable on July 1 of each year beginning in 20X4. What is interest revenue for 20X3?

    My question is, if there are 4 equal annual payments of principal and interest of 88,332 for the 280,000 note, wouldn’t each annual payment be 70,000 principal and 28,000 interest for a total of 98,000?

    But since it was 88,332, I didn’t know whether I should subtract 70,000 principal from it and conclude 18,332 as interest or subtract 28,000 interest from it and conclude that the principal paid was 60,332.

    FAR 85 June 2015
    AUD 80 Nov 2015
    REG 83 Nov 2015
    BEC 79 Feb 2016

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  • #666895
    Meeekks
    Member

    It's 10% of the principal balance. So the first year is 280k x 10% = 28k. That would be the interest expense for the 1st year. So then you have to subtract the interest expense from the annual payment to get the amount that reduces the principal.

    So at the end of first year it's:

    88332 annual payment

    – 28k interest expense

    = 60332 <— amount deducted from principal

    So then year 2 principal will be 280k – 60332 = 219668

    88332 annual payment

    – 21967 interest expense (219668 principal x 10%)

    = 66365 deducted from principal

    So the amount deducted from the principal is not the same every year. More of the principal gets deducted every year so the interest is less. I hope this makes sense, I'm not very good at explaining. Maybe someone else can explain it better.

    #666896
    Oimie
    Member

    @Meeekks: Thank you. I suddenly forgot about the fact that principal payments will change the amount of interest.

    FAR 85 June 2015
    AUD 80 Nov 2015
    REG 83 Nov 2015
    BEC 79 Feb 2016

Viewing 2 replies - 1 through 2 (of 2 total)
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