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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.


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

Opening balance
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.