Account for notes payale with periodic payments of principal and interest.

Ultra Power, Inc. engaged in the following transactions related to long term liabilities during 2011:

a. On March 1, the company borrowed $50,000 for a machine. The loan is to be repaid in equal annual payments of $6,793 at the end of each of the next 10 years (beginning February 28, 2012); the interest rate is 6%

b. On October 1, the company borrowed $100,000 from the local credit union at an interst rate of 8%. The loan is for seven yhears, and Ultra power will make annual payments of $19,207 on September 30 of each year.

 

Requirements

1. For each loan, prepare an amortization schedule for the first four payments. Show the reduction in principal and the interest expense for each payment.

2. What total interest explense related to these two loans would Ultra Power, Inc. Show on its income statement for the year ended December 31, 2011

3. How much interst payable would Ultra Power Inc, show on its balance sheet at December 31, 2011?

Sheet1

3

A

6

7

Amount

Amount

Amount

date, February

Annual payment

Amount

12

Amount

–

Amount – 0 – 0 – 0

Amount – 0 – 0 – 0

Amount – 0 – 0 – 0

Principal Amount

Term in years Amount

20 Interest rate Amount

Payment Amount

Annual payment Interest expense Reduction in principal Principal balance

Beginning bal. Amount

Amount

$0 –

2013 Amount – 0 – 0 – 0

2014 Amount – 0 – 0 – 0

2015 Amount – 0 – 0 – 0

28

Machine a.

30 Machine b.

$ – 0

Machine a.

Machine b.

$ – 0

																																																																																																														Problem	7		–	6	A	Name
Section
B	C	D	E	F	G	H
5	Part 1.	Ultra Power, Inc
		Machine a.
	Principal																		Amount
8		Term in years
9		Interest rate
10		Payment
11			Annual payment	28		Interest expense		Reduction in principal		Principal balance
12		Beginning bal.
13		20	$																		– 0		$0
14		2013
15		2014
16		2015
17			Machine b.
18
19
21
22	Annual payment date, September	30
23
24	2012			$ – 0
25
26
27
Part 2.
29	Formula 1
Formula 2
31	Total interest shown on income statement
32	Part 3.
33	Formula 3
34	Formula 4
35	Total interest payable shown on balance sheet
36
End of Problem

&LReimers, Financial Accounting 3e

Sheet2

Sheet3