B is corrent because Money Co. made a cash outflow of $194,000 for the $200,000 loan Money gave to Home Co. The book value of the loan is $194,000 on Money’s books. Money will receive an effective interest rate of 12.4% on its cash outflow. Income from the loan would be calculated by multiplying the book value, times the effective interest rate, and the number of months of the year (in this case just 1--December). $194,000 x .124 x 1/12 = $2,004.67. The stated rate is 11% and is not used in the calculation. Money Co. will receive equal monthly installments over the 60-month life of the loan. Money Co. will effectively earn 12.4% on its initial cash outflow of $194,000, because Home Co. will repay principal for the total loan amount of $200,000.
A is incorrect. Money Co. made a cash outflow of $194,000 for the $200,000 loan Money gave to Home Co. The book value of the loan is $194,000 on Money’s books. Money will receive an effective interest rate of 12.4% on its cash outflow. Income from the loan would be calculated by multiplying the book value, times the effective interest rate, and the number of months of the year (in this case just 1--December). $194,000 x .124 x 1/12 = $2,004.67. The stated rate is 11% and is not used in the calculation. Money Co. will receive equal monthly installments over the 60-month life of the loan. Money Co. will effectively earn 12.4% on its initial cash outflow of $194,000, because Home Co. will repay principal for the total loan amount of $200,000.
A is incorrect. Money Co. made a cash outflow of $194,000 for the $200,000 loan Money gave to Home Co. The book value of the loan is $194,000 on Money’s books. Money will receive an effective interest rate of 12.4% on its cash outflow. Income from the loan would be calculated by multiplying the book value, times the effective interest rate, and the number of months of the year (in this case just 1--December). $194,000 x .124 x 1/12 = $2,004.67. The stated rate is 11% and is not used in the calculation. Money Co. will receive equal monthly installments over the 60-month life of the loan. Money Co. will effectively earn 12.4% on its initial cash outflow of $194,000, because Home Co. will repay principal for the total loan amount of $200,000.
D is incorrect. Money Co. made a cash outflow of $194,000 for the $200,000 loan Money gave to Home Co. The book value of the loan is $194,000 on Money’s books. Money will receive an effective interest rate of 12.4% on its cash outflow. Income from the loan would be calculated by multiplying the book value, times the effective interest rate, and the number of months of the year (in this case just 1--December). $194,000 x .124 x 1/12 = $2,004.67. The stated rate is 11% and is not used in the calculation. Money Co. will receive equal monthly installments over the 60-month life of the loan. Money Co. will effectively earn 12.4% on its initial cash outflow of $194,000, because Home Co. will repay principal for the total loan amount of $200,000.
|
