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## 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

 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.