Question

Questions 3 - 5 use the below data. You bought a piece of equipment by signing the following note payable. The note is due at maturity and interest is due annually. Face value 355,600 Coupon rate 4.3% Market rate 7.5% Term What is the amount of interest expense in year 3 under GAAP? Multiple Choice O 26,670 O 23,812 O 22,664 O 15,291

Answer 1

Market price of note payable
a	Annual Interest Amount	$      15,290.80
	($355600*4.3%)
b	PV Annuity Factor for (6 Years,7.5%)	4.69385
c	Present Value Of Annual Interest (a*b)	$      71,772.67
d	Redemption Value	$ 3,55,600.00
e	PV Factor Of (6 Years,7.5%)	0.64796
g	Present Value Of Redemption Amount (d*e)	$ 2,30,415.12
f	Market price	$ 3,02,187.78

Calculation of amortization schedule
Year	Opeaning Balance	Interest expenses at 7.5%	Interest payment	Closing balance
1	$                 3,02,188	$                                     22,664	$                   15,291	$            3,09,561
2	$                 3,09,561	$                                     23,217	$                   15,291	$            3,17,487
3	$                 3,17,487	$                                     23,812	$                   15,291	$            3,26,008
4	$                 3,26,008	$                                     24,451	$                   15,291	$            3,35,168
5	$                 3,35,168	$                                     25,138	$                   15,291	$            3,45,015
6	$                 3,45,015	$                                     25,876	$                   15,291	$            3,55,600
Correct Option: SECOND