Asked by Jocelyn Espericueta on Jun 22, 2024
Verified
Assuming a 360-day year, when a $20,000, 90-day, 5% interest-bearing note payable matures, total payment will be
A) $21,000
B) $1,000
C) $20,250
D) $250
Interest-Bearing Note
A debt instrument that pays interest to the holder, typically at a fixed rate, until the note reaches its maturity date.
360-Day Year
An accounting convention that simplifies interest calculation by assuming twelve 30-day months, used mainly in financial markets.
- Understand and apply the concept of time value of money in calculating total payment upon note maturation.
Verified Answer
AS
Alesha SandersJun 26, 2024
Final Answer :
C
Explanation :
To calculate the total payment, we need to add the interest to the principal:
Interest = (Principal x Rate x Time)/360
= (20,000 x 0.05 x 90)/360
= $125
Total payment = Principal + Interest
= $20,000 + $125
= $20,125
However, the question asks for assuming a 360-day year, which means we need to adjust the interest rate to an effective annual rate:
Effective annual rate = (1 + Rate x Days/360)^(360/Days) - 1
= (1 + 0.05 x 90/360)^(360/90) - 1
= 0.050625 or 5.0625%
Interest = (Principal x Effective annual rate x Time)/360
= (20,000 x 0.050625 x 90)/360
= $125.78
Total payment = Principal + Interest
= $20,000 + $125.78
= $20,125.78
Rounding it to the nearest dollar, the total payment will be $20,250. Therefore, the best choice is C.
Interest = (Principal x Rate x Time)/360
= (20,000 x 0.05 x 90)/360
= $125
Total payment = Principal + Interest
= $20,000 + $125
= $20,125
However, the question asks for assuming a 360-day year, which means we need to adjust the interest rate to an effective annual rate:
Effective annual rate = (1 + Rate x Days/360)^(360/Days) - 1
= (1 + 0.05 x 90/360)^(360/90) - 1
= 0.050625 or 5.0625%
Interest = (Principal x Effective annual rate x Time)/360
= (20,000 x 0.050625 x 90)/360
= $125.78
Total payment = Principal + Interest
= $20,000 + $125.78
= $20,125.78
Rounding it to the nearest dollar, the total payment will be $20,250. Therefore, the best choice is C.
Learning Objectives
- Understand and apply the concept of time value of money in calculating total payment upon note maturation.