The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying amount of the note at the end of the period. True False

Solution :

True, The interest portionof an installment

note payment is computed by multiplying the interest rate

by the carrying amount of the note at the end of the

period. This can be justified by the following example

:

e.g : Business borrows 40,000 at the start of an accounting

period (January 1) by signing a 5% installment note that is to be

repaid in 4 annual end of year payments of 11,280. The first

payment is due at the end of the accounting period (December

31).

Calculation of Interest each year

Year 1=40000*5%=2000

Year 2=30720*5%1536

Year 3=20975*5%=1049

Year 4=10743*5%=537

Particulars | Year 1 | Year 2 | Year 3 | Year 4 |

Opening | 40000 | 30720 | 20975 | 10743 |

[email protected]% | 2000 |
1536 |
1049 |
537 |

Fixed Installment | 11280 | 11280 | 11280 | 11280 |

Closing | 30720 | 20975 | 10743 | 0 |

Principal | 9280 | 9744 | 10232 | 10743 |