Sandra Gloy borrowed $5,000 on a 120-day 5% note. Sandra paid $500 toward the note on day 40. On day 90 she paid an additional $500. Using the U.S. Rule, her adjusted balance after the first payment is:
A)$4,527.87
B)$4,725.87
C)$4,725.70
D)$4,527.78
E)None of these

Question

Quizplus · Accepted Answer

Using the U.S. Rule, the interest on the note for the first 40 days is calculated on the original principal of $5,000. 
Interest for the first 40 days: $5,000 x 5% x (40/360) = $22.22
The payment of $500 is applied first to the interest due, then to the principal. 
Remaining balance after day 40: $5,000 + $22.22 - $500 = $4,522.22

For the period between day 40 and day 90, interest is still calculated on the original principal of $5,000 because no additional payments have been made yet. 
Interest for the period between day 40 and day 90: $5,000 x 5% x (50/360) = $34.72
The payment of $500 is applied first to the interest due, then to the principal. 
Remaining balance after day 90: $4,522.22 + $34.72 - $500 = $4,056.94

Using the U.S. Rule, the interest due on day 120 is calculated on the adjusted balance of $4,056.94. 
Final interest due: $4,056.94 x 5% x (30/360) = $16.90
Adjusted balance after the second payment: $4,056.94 + $16.90 = $4,073.84

Therefore, the correct answer is D) $4,527.78 (rounded to the nearest cent).

Sandra Gloy Borrowed $5,000 on a 120-Day 5% Note