Problem

Loan interest deductions Liz Rogers just closed a $10,000 business loan that is to be repa...

Loan interest deductions Liz Rogers just closed a $10,000 business loan that is to be repaid in three equal, annual, end-of-year payments. The interest rate on the loan is 13%. As part of her firm’s detailed financial planning, Liz wishes to determine the annual interest deduction attributable to the loan. (Because it is a business loan, the interest portion of each loan payment is tax-deductible to the business.)

a. Determine the firm’s annual loan payment.


b. Prepare an amortization schedule for the loan.


c. How much interest expense will Liz’s firm have in each of the next 3 years as a result of this loan?

Step-by-Step Solution

Solution 1

Liz Rogers just closed a $10,000 business loan that is to be repaid in 3 equal, annual, end-of-year payments with an interest rate of 13%.

a. The equal, annual, end-of-year payments required each year over the life of the loan to repay the loans can be calculated by using spreadsheet as given below:

Hence the annual, end-of-year loan payment is $4,235.22

b. The loan amortization schedule is prepared below:

c. The interest expense to be paid by Liz’s firm for the next 3 years is as follows:

YEAR

INTEREST

1

$1300.00

2

$918.42

3

$487.24

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