MHB Debbie's question from Facebook on interest rates

[Jameson]

I'm needing help w/ an accounting issue that deals with applying interest annually. The interest rate is 10%. It doesn't say if it's compounded or simple so which is to be used?

If you start with a balance of \$20323.64 in Jan, and make twelve monthly payments of \$200 each (total \$2400) how much $ in interest is charged, when is it applied (Jan, monthly, or Dec etc?) and what's the ending balance for the year?

Please help me out, and explain your answer so that I'll know how to do it next time ok? Thanks!

 

[Sudharaka]

I'm needing help w/ an accounting issue that deals with applying interest annually. The interest rate is 10%. It doesn't say if it's compounded or simple so which is to be used?

If you start with a balance of \$20323.64 in Jan, and make twelve monthly payments of \$200 each (total \$2400) how much $ in interest is charged, when is it applied (Jan, monthly, or Dec etc?) and what's the ending balance for the year?

Please help me out, and explain your answer so that I'll know how to do it next time ok? Thanks!

Hi Debbie, :)

Looking forward to seeing you on Math Help Boards. :)

I don't think it matters whether the interest is simple or compound if it is applied in January or December on an annual basis provided that you want to find the balance at the end of the first year. Suppose the interest is calculated each January. At the moment of calculation you have a balance of \(\$ 20323.64\) in the account and the interest gained in the first year is therefore, \(\$ 20323.64\times \frac{10}{100}\). So at the end of the first year you will have a balance of,

\[\$ 20323.64+\$2400+\left(\$ 20323.64\times \frac{10}{100}\right)\]

Similarly if the interest is calculated in December, you'll have to find the total amount of money in the account in December and perform the calculation as above. If the interest is charged monthly, then it should be given whether to use simple or compound interest.

Kind Regards,
Sudharaka.