Question

On January 1, 2021, the Merit Group issued to its bank a $38 million, five-year installment note to be paid in five equal payments at the end of each year. Installment payments of $9.417 million annually include interest at the rate of 7.6%.

Required: What would be the amount(s) related to the note that Merit would report in its statement of cash flows for the year ended December 31, 2021?

Answer 1

Merit Group would report a cash outflow of $2.888 million for interest and $6.529 million for principal repayment on their 2021 cash flow statement related to the $38 million, five-year installment note with a 7.6% interest rate.

Step-by-step explanation:

When the Merit Group issued a $38 million, five-year installment note with a 7.6% interest rate, the total annual installment payment was determined to be $9.417 million. For the year ended December 31, 2021, the statement of cash flows for Merit will report two primary figures related to this note: the interest component and the principal component of the installment paid.

First, we need to calculate the interest portion for the year. This is done by multiplying the outstanding principal at the beginning of the year by the interest rate:

Interest for 2021 = $38 million * 7.6% = $2.888 million

The principal component is then the remainder of the annual payment after subtracting the interest portion:

Principal repayment for 2021 = Total installment payment - Interest for 2021
= $9.417 million - $2.888 million
= $6.529 million

Thus, on the cash flow statement for 2021, Merit would report an outflow of $2.888 million for interest and $6.529 million for the repayment of the principal amount of the note.

Answer 2

The correct solution is provided below.

Step-by-step explanation:

Given:

The cash inflow,

= $38

Interest rate,

= 7.6%

or,

= 0.076

Now,

The annually interest will be:

=
`38* 0.076* 1`

=
`2.89` ($)

Or,

The installment payment without interest will be:

=
`9.417-2.89`

=
`6.53` ($)