Question

lorenzo company borrowed $12,000 on a 1-year, 5 percent note payable from the local bank on april 1. interest was paid quarterly, and the note was repaid one year from the time the money was borrowed. calculate the amount of cash payments lorenzo was required to make in each of the two calendar years that were affected by the note payable.

Answer 1

Lorenzo Company must make two interest payments of $150 each in the first year, totaling $300. In the second year, they make two more interest payments of $150 each plus the $12,000 principal repayment, totaling $12,300.

Step-by-step explanation:

The question involves calculating the cash payments for interest and principal on a note payable that was issued by Lorenzo Company. The note is a 1-year, 5 percent note for $12,000, with interest paid quarterly. To find the cash payments for each calendar year, we must first calculate the quarterly interest payment, which is $12,000 times 5 percent annual interest rate, divided by 4, because there are four quarters in a year.

The quarterly interest payment is $12,000 × 0.05 / 4 = $150. Since the loan was taken out on April 1st and paid quarterly, two interest payments will be made in the first calendar year (April 1 and July 1), and two more will be made in the next calendar year (October 1 and January 1) before the principal is repaid. Thus, the total cash payments in the first year amount to $150 × 2 = $300, and in the second year, the payments will include two more interest payments of $150 each plus the $12,000 principal repayment, totaling $300 + $12,000 = $12,300.