How to prepare an installment payment schedule?
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You calculate interest expense by multiplying the annual interest rate (5%) by the outstanding principal (110,162 before the first payment is made) by the amount of time before the payment (half a year).
In other words, before the first payment is made on June 30, the company has had the use of $110,162 for six months; so they owe interest expense of $110,162 * 5% * 1/2 year = $2,754.05. This means that the rest of the $20,000 payment reduced the principal (20,000 - 2,754.05 = 17,245.95).
The next payment will include less interest expense because the principal is now $92,916.05 (110,162 - 17,245.95). So interest expense is now: 92,916.05 * 5% * 1/2 = $2,322.90, meaning the principal is reduced by $17,677.10 so it becomes $75,238.95. The next interest expense calculation will be based on this new principal amount, and so on...
In other words, before the first payment is made on June 30, the company has had the use of $110,162 for six months; so they owe interest expense of $110,162 * 5% * 1/2 year = $2,754.05. This means that the rest of the $20,000 payment reduced the principal (20,000 - 2,754.05 = 17,245.95).
The next payment will include less interest expense because the principal is now $92,916.05 (110,162 - 17,245.95). So interest expense is now: 92,916.05 * 5% * 1/2 = $2,322.90, meaning the principal is reduced by $17,677.10 so it becomes $75,238.95. The next interest expense calculation will be based on this new principal amount, and so on...
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