On October 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest be paid at the end of each year on September 30. The present value of an annuity factor for 3 years at 6% is 2.6730. The payment will be:
A) $10,000.00.
B) $11,223.34.
C) $10,800.00.
D) $10,400.00.
E) $1,223.34.

Question

Quizplus · Accepted Answer

The first step is to calculate the total amount payable over the 3 years using the present value of an annuity factor:

Total payment = Present value factor x Annual payment
Total payment = 2.6730 x Annual payment

The total payment needs to be equal to the amount borrowed, which is $30,000. So we can set the two equations equal to each other and solve for the annual payment:

2.6730 x Annual payment = $30,000
Annual payment = $30,000 / 2.6730
Annual payment = $11,223.34

Therefore, the annual payment is $11,223.34, which is option B.

On October 1, a $30,000, 6%, 3-Year Installment Note Payable