A debt of $5000 is to be paid off by installments of $2000 in 30 days,$2500 in 60 days,and a final payment of $584.15.If simple interest is charged at r = 12% and the Declining Balance Method is used,in how many days should the final payment be made?
A)25
B)32
C)85
D)92

Question

Quizplus · Accepted Answer

The correct answer is A.The Declining Balance Method is a method of calculating depreciation in which the depreciation expense is calculated as a percentage of the book value of the asset. In this case, the book value of the asset is the amount of the debt that remains unpaid. The percentage used to calculate the depreciation expense is the interest rate.The first payment of $2000 reduces the book value of the debt to $3000. The second payment of $2500 reduces the book value of the debt to $500. The final payment of $584.15 reduces the book value of the debt to $0.The interest expense for the first 30 days is $5000 * 12% * 30/360 = $50. The interest expense for the next 30 days is $3000 * 12% * 30/360 = $30. The interest expense for the final 25 days is $500 * 12% * 25/360 = $8.33.The total interest expense is $50 + $30 + $8.33 = $88.33.The total amount of the debt that was paid off is $5000 + $88.33 = $5088.33.The final payment of $584.15 was made 25 days after the second payment.

A Debt of $5000 Is to Be Paid Off by Installments