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Chapter 9

Q. 9.6

On January 1st, 20X4, the GlassWare S.A. borrowed 100,000 lei from Trade International Bank at a 12% annual interest rate. The loan is payed in four equal annual instalments, starting on December 31st, 20X4. Provide the computations of arrears and interest and the journal entries.

Step-by-Step

Verified Solution

Let’s assume the following formula of P:

P = C*(1 − v)/[v(1 − v^{n})], where P is the amount of an instalment, v  the discount factor v = 1/(1 + i), C is the capital borrowed, i the annual interest rate and n the number of annual payments.
At a 12% interest rate, the instalment is: P = 32,923.4 lei (Table 9.2).

Table 9.2 Loan amortisation table

Years
0
Instalment
1
Opening balance
2
Interest
3 = 2 * 12%
Capital payment
4 = 1 − 3
Closing balance
5 = 2 − 4
31 Dec.20X4 32,923 100,000 12,000 20,923 79,077
31 Dec.20X5 32,923 79,077 9489 23,434 55,643
31 Dec.20X6 32,923 55,643 6677 26,246 29,397
31 Dec.20X7 32,923 29,397 3527 29,397 0

 

a) The receipt of the loan on January 1st, 20X4:


100,000 lei              Cash           =            Bank loan payable                 100,000 lei


 

c) Payment of capital and interest on December 31st, 20X4:


32,923 lei            %                                     =       Cash                             32,923 lei

20,923 lei           Bank loan payable
12,000 lei           Interest expense


 

Entry b) is repeated with appropriate amounts on December 31st, 20X5, 20X6 and 20X7.