A bank makes a 5-year $75,000 loan with no principal payments in years 1-2 and principal payments of $25,000 in Years 3, 4 and 5. The interest rate is 8% and will be paid every year. What interest and principal is paid in year 4

A bank makes a 5-year $75,000 loan with no principal payments in years 1-2 and principal payments of $25,000 in Years 3, 4 and 5. The interest rate is 8% and will be paid every year. What interest and principal is paid in year 4

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter12: Current Liabilities

Section: Chapter Questions

Problem 4MC: A ski company takes out a $400,000 loan from a bank. The bank requires eight equal repayments of the...

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Question

A bank makes a 5-year $75,000 loan with no principal payments in years 1-2 and principal payments of $25,000 in Years 3, 4 and 5. The interest rate is 8% and will be paid every year. What interest and principal is paid in year 4

A

$6,000 + $25,000

B

$6,000+$50,000

C

$4,000+$25,000

D

$4,000+$50,000

Expert Solution

Step 1

To solve the question, we need to make an amortization table.

The logic to compute the amortization table is as follows:

Interest = Previous period balance x interest rate (8%)
Principal = Amount given for that year ($25,000 in year 3,4 and 5)
Payment = Interest + Principal
Balance = Previous period balance - principal

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