Martinez Inc. developed a new sales gimmick to help sell its inventory of new au

Question

Martinez Inc. developed a new sales gimmick to help sell its inventory of new automobiles. Because many new car buyers need financing, Martinez offered a low downpayment and low car payments for the first year after purchase. It believes that this promotion will bring in some new buyers January 1, 2017, a customer purchased a new $29,000 automobile, making a downpayment of $760. The customer signed a note indicating that the annual rate of interest would be 8% and that quarterly payments would be made over 3 years. For the first year, Martinez required a $353 quarterly payment to be made on April 1, July 1, October 1, and January 1, 2018. After this one-year period, the customer was required to make regular quarterly payments that would pay off the loan as of January 1, 2020 Prepare a note amortization schedule for the first year. (Round answers to 0 decimal places, e.g. 38,548.) Cash Paid Interest Expense Discount Amortized - Carrying Amount of Note Date 2824 35 35 35 35 Indicate the amount the customer owes on the contract at the end of the first year. (Round answer to 0 decimal places, e.g. 38,548.) The customer owes on the contract at the end of the first year

Explanation / Answer

Note amortisation schedule for the First year Date Cash paid Interest expense at 8%/4=2% per qtr. Discount amortised Carrying amt.of Note 1/1/2017 28240 4/1/2017 353 565 212 28240 7/1/2017 353 565 212 28240 10/1/2017 353 565 212 28240 1/1/2018 353 565 212 28240 The customer owes on the contract at the end of the first year = $ 28240 ,as interest payable exceeds the cash paid every quarter ,full payment is made towards interest & nothing is paid towards principal. So, the entire (29000-760)= 28240 is pending at end of 1st year. The new quartely payment is calculated using the PV of ordinary annuity formula ,as follows: 28240=Pmt.*(1-1.02^-8)/0.02 Solving the above equation, Quarterly payment= 3855.04 or 3855 Note amortisation schedule for the next 2 years Date Cash paid Interest expense at 8%/4=2% per qtr. Discount amortised Carrying amt.of Note 1/1/2018 28240 4/1/2018 3855 565 3290 24950 7/1/2018 3855 499 3356 21594 10/1/2018 3855 432 3423 18171 1/1/2019 3855 363 3492 14679 4/1/2019 3855 294 3561 11117 7/1/2019 3855 222 3633 7485 10/1/2019 3855 150 3705 3779 1/1/2020 3855 76 3779 0 30840 2600 28240

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