You have been pricing a compact disk player in several stores. Three stores have the identical...

Question:

You have been pricing a compact disk player in several stores. Three stores have the identical price of $300. Each store charges 18 percent APR, has a 30 day grace period and sends out bills on the first of the month.

On further investigation you find that store A calculates the finance charge by using the average daily balance method, store B uses the adjusted balance method and store C uses the previous balance method.

Assume you purchased the disk player on May, 5 and made a $100 payment on June 15. What will the finance charge be (for June) if you made you purchase from store A? From store B? From store C?

Finance Charges

Finance charges mean the charges which are paid on the loan or any finance taken from the bank this expenses will be recorded in the debit side of the income statement.

Answer and Explanation:

Particulars Calculations Results
APR 18%
Thus, Monthly interest rate 18% / 12 1.50%
For Store A who uses average daily balance method:
Average daily balance (300 + 200) / 2 $250
Financial charge 250 * monthly interest rate 250*1.5% $3.75
For Store B who uses adjusted balance method:
Adjusted balance 300 - 100 $200
Financial Charge 200 * monthly interest rate 200 *1.5% $3
For Store C who uses previous balance method:
Previous balance $300 ? 0 $300
Financial Charge 300 * monthly interest rate 300 * 1.5% $4.5


Learn more about this topic:

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What Is Financing? - Definition & Types

from Corporate Finance: Help & Review

Chapter 8 / Lesson 7
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