A small industrial contractor purchased a warehouse building for storing equipment and materials that are not immediately needed at construction job sites. The cost of the building was $100,000 and the contractor has just made an agreement with the seller to finance the purchase over a 5-year period. The agreement states that monthly payments will be made based on a 30-year repayment schedule of interest on the unrecovered balance of the principal; however, the total remaining balance of principal and interest at the end of year 5 must be paid in a lump-sum “balloon” payment. What is the size of the balloon payment, if the interest rate on the loan is 0.5% per month?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A small industrial contractor purchased a warehouse
building for storing equipment and materials
that are not immediately needed at construction
job sites. The cost of the building was $100,000
and the contractor has just made an agreement
with the seller to finance the purchase over a 5-year
period. The agreement states that monthly payments
will be made based on a 30-year repayment
schedule of interest on the unrecovered balance of
the principal; however, the total remaining balance
of principal and interest at the end of year 5 must
be paid in a lump-sum “balloon” payment. What is
the size of the balloon payment, if the interest rate
on the loan is 0.5% per month?
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