Question

Good-Deal Inc. developed a new sales gimmick to help sell its inventory of new automobiles. Because many new car buyers need financing, Good-Deal offered a low down payment and low car payments for the first year after purchase. It believes that this promotion will bring in some new buyers.

On January 1, 2017, a customer purchased a new \(33,000 automobile, making a down payment of \)1,000. The customer signed a note indicating that the annual rate of interest would be 8% and that quarterly payments would be made over 3 years. For the first year, Good-Deal required a $400 quarterly payment to be made on April 1, July 1, October 1, and January 1, 2018. After this one-year period, the customer was required to make regular quarterly payments that would pay off the loan as of January 1, 2020.

Instructions

(a) Prepare a note amortization schedule for the first year.

(b) Indicate the amount the customer owes on the contract at the end of the first year.

(c) Compute the amount of the new quarterly payments.

(d) Prepare a note amortization schedule for these new payments for the next 2 years.

(e) What do you think of the new sales promotion used by Good-Deal?

Short answer

1. The outstanding amount on 1 Jan 2018 is $32,990.
2. $990of interest gets accumulated at the end of year 1.
3. The new quarterly payment totals$4,504.
4. The carrying amount of notes payable will be$0 on 1 Jan 2020.
5. New sales promotion is not effective.

Step-by-step solution

Definition of Note Receivable

The promissory note that reflects the amount owed by the business entity to its customer is known as a note receivable. The customer makes a written promise to repay the outstanding amount.

Note amortization schedule for the first year

Date	Cash paid	Interest expenses	Discount amortized	Carrying amount of note
1 Jan 2017				$32,000
1 April 2017	$400	$640	$240	32,240
1 July 2017	400	645	245	32,485
1 Oct 2017	400	650	250	32,735
1 Jan 2018	400	655	255	32,990

Working note:

$\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}\mathit{s}\mathbf{=}\mathit{C}\mathit{a}\mathit{r}\mathit{r}\mathit{y}\mathit{i}\mathit{n}\mathit{g}\mathit{V}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{o}\mathit{f}\mathit{n}\mathit{o}\mathit{t}\mathit{e}\mathit{o}\mathit{f}\mathit{p}\mathit{r}\mathit{e}\mathit{v}\mathit{i}\mathit{o}\mathit{u}\mathit{s}\mathit{p}\mathit{e}\mathit{r}\mathit{i}\mathit{o}\mathit{d}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{4}}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathit{r}\mathit{a}\mathit{t}\mathit{e}$

Amountthe customer owes at the end of the first year

At the end of the first year, the customer owes the principal amount of $32,000 and an interest amount of $990.

Amount of new quarterly payment

$\begin{array}{rcl}\mathit{N}\mathit{e}\mathit{w}\mathit{q}\mathit{u}\mathit{a}\mathit{r}\mathit{t}\mathit{e}\mathit{r}\mathit{l}\mathit{y}\mathit{p}\mathit{a}\mathit{y}\mathit{m}\mathit{e}\mathit{n}\mathit{t}& \mathbf{=}& \frac{\mathbf{Outstandingamountatendoffirstyear}}{\mathbf{PVOA}\mathbf{(}\mathbf{2}\mathbf{\%}\mathbf{,}\mathbf{8}\mathbf{)}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{32}\mathbf{,}\mathbf{990}}{\frac{\mathbf{1}\mathbf{-}\frac{\mathbf{1}}{{\mathbf{(}\mathbf{1}\mathbf{+}\mathbf{0}\mathbf{.}\mathbf{02}\mathbf{)}}^{\mathbf{8}}}}{\mathbf{0}\mathbf{.}\mathbf{02}}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{32}\mathbf{,}\mathbf{990}}{\mathbf{7}\mathbf{.}\mathbf{325}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{504}\\ & & \end{array}$

Note the amortization schedule for new payments

Date	Cash paid	Interest expenses	Discount amortized	Carrying amount of note
1 Jan 2018				$32,990
1 April 2018	$4,504	$660	$3,844	29,146
1 July 2018	4,504	583	3,921	25,225
1 Oct 2018	4,504	505	3,999	21,226
1 Jan 2019	4,504	425	4,079	17,147
1 April 2019	4,504	343	4,161	12,986
1 July 2019	4,504	260	4,244	8,742
1 Oct 2019	4,504	175	4,329	4,413
1 Jan 2020	4,504	88	4416	0

Working note:

$\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}\mathit{s}\mathbf{=}\mathit{C}\mathit{a}\mathit{r}\mathit{r}\mathit{y}\mathit{i}\mathit{n}\mathit{g}\mathit{V}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{o}\mathit{f}\mathit{n}\mathit{o}\mathit{t}\mathit{e}\mathit{o}\mathit{f}\mathit{p}\mathit{r}\mathit{e}\mathit{v}\mathit{i}\mathit{o}\mathit{u}\mathit{s}\mathit{p}\mathit{e}\mathit{r}\mathit{i}\mathit{o}\mathit{d}\mathbf{\times }\frac{\mathbf{1}}{\mathbf{4}}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathit{r}\mathit{a}\mathit{t}\mathit{e}$

Suggestions for new sales promotion

The new sales promotion technique is not good because it will bring customers to the showroom, but as soon as they know about the repayment terms, they will not buy the car. It is because many customers will not be able to afford the increase in the amount of installments.