Assume that you purchase a car for $20,000 in September. You make a down payment of $3000 and finance the remaining amount $17000 with a 4-year, 5.5% installment loan payable monthly. Your September 30 income statement would show a cash expenditure of $3000, and each subsequent monthly income statement would your monthly loan payment of:
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A. B. C. D.A
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The first step is to calculate the monthly payment for the loan. We can use the formula for calculating the payment for an installment loan:
Payment = (P * r) / (1 - (1 + r)^-n)
where:
So for this loan, we have:
Substituting these values into the formula, we get:
Payment = (17,000 * 0.00458333) / (1 - (1 + 0.00458333)^-48) = $395.03 (rounded to 2 decimal places)
So the monthly loan payment is $395.03.
Now, let's look at the income statement for September. We made a down payment of $3,000, so the cash expenditure for the car purchase is $3,000. There is no loan payment in September because the first payment is usually due one month after the loan is disbursed.
For the subsequent monthly income statements, we will show a loan payment of $395.03. This payment will consist of two parts: principal and interest. The interest part of the payment will decrease over time as the loan balance decreases, while the principal part of the payment will increase. The total monthly payment will remain the same throughout the term of the loan.
So the correct answer is (A) $395.