Example 15 Scenario  

This example is based on the facts in Example 14. See entire scenario below for full version.

 

In the previous example:

 

In this example:

 

Demonstrated Features

 

Points of Interest

 

Multimedia Presentation

 

Entire Scenario

There are a series of transactions on Mr Smith's account - the first one is on 16 July 2004 and the last one is on 23 November 2006, the balance is currently $6704.35.

 

DATE	DESCRIPTION	AMOUNT	BALANCE
16/07/2004	Invoice No. 504	$950.05	$950.05
24/01/2005	Invoice No. 505	$1,482.18	$2,432.23
12/10/2005	Cheque No. 439758	$2,772.83CR	$340.60CR
05/11/2005	Invoice No. 506	$1,313.14	$972.54
11/11/2005	Dishonoured Cheque Fee	$50.00	$1,022.54
14/01/2006	Invoice No. 507	$3,071.38	$4,093.92
10/04/2006	Cheque No. 439759	$2,950.00CR	$1,143.92
26/05/2006	Invoice No. 508	$7,076.15	$8,220.07
15/07/2006	Cheque No. 439760	$1,447.98CR	$6,772.09
23/11/2006	Cheque No. 439761	$67.74CR	$6,704.35

 

He's given a lot of business over the years and has always paid up eventually, but the account has lost too much control now.

 

The credit supply agreement says that interest may be charged daily at the prevailing interest rate that the store pays on its own bank overdraft account, uplifted by 10% of whatever the rate is. For example 5% becomes 5.5% (5% x 1.1). The overdraft rates, before uplift, are:

 

       From                        Rate

       4/4/2004                4%

       5/5/2005                5%

       6/6/2006                6%

       7/7/2007                7%

       8/8/2008                8%

 

       These rates increase as the balance increases:

 

       Balances Over        Additional Rate

       $0                        0.0%

       $2,000                        0.2%

       $4,000                        0.4%

       $6,000                        0.6%

       $8,000                        0.8%

 

The credit supply agreement also says that if the customer's account goes into credit (i.e. the store owes the customer) the store must pay the customer interest at a static rate of 2.5%.

 

Interest is to be calculated daily.

 

Interest is not compounded.

 

Payments are allocated to the best benefit of the customer (i.e. debtor).

 

We wish to calculate interest as at 21 September 2007.

 

Calculation Results

The results generated by the program are shown below.

 

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Calculation Result

Example 15

 

 

SUMMARY

 

 

 

 

 

 

 

 

 

TRANSACTION HISTORY BEFORE INTEREST IS TAKEN INTO ACCOUNT

DATE	DESCRIPTION	AMOUNT	BALANCE
16/07/2004	Invoice No. 504	$950.05	$950.05
24/01/2005	Invoice No. 505	$1,482.18	$2,432.23
12/10/2005	Cheque No. 439758	$2,772.83CR	$340.60CR
05/11/2005	Invoice No. 506	$1,313.14	$972.54
11/11/2005	Dishonoured Cheque Fee	$50.00	$1,022.54
14/01/2006	Invoice No. 507	$3,071.38	$4,093.92
10/04/2006	Cheque No. 439759	$2,950.00CR	$1,143.92
26/05/2006	Invoice No. 508	$7,076.15	$8,220.07
15/07/2006	Cheque No. 439760	$1,447.98CR	$6,772.09
23/11/2006	Cheque No. 439761	$67.74CR	$6,704.35

 

 

PARTICULARS OF INTEREST

 

(a) On 16/07/2004 the opening principal was $950.05, the interest rate on debit balances was amount-dependent rates (namely 4.4% from $0.00, then 4.62% from $2,000.00, then 4.84% from $4,000.00, then 5.06% from $6,000.00, then 5.28% from $8,000.00), the interest rate on credit balances was 2.5% per annum, and the days per year base used to convert the annual interest rates into daily interest rates was 366.

 

 

 

 

(b) Debits and Credits are each applied to principal then to interest then to non-principal.

 

(c) Calculated interest on 31/12/2004 because it was the last day before the days per year base changed (from 366 to 365) on 01/01/2005. Interest on $950.05 (principal) at 4.4% per annum × 169 days (16/07/2004 to 31/12/2004 inclusive) ÷ 366 (days per year) is $19.30, resulting in a new unpaid interest balance of $19.30 ($0.00 plus $19.30).

 

(d) On 01/01/2005 the days per year base used to convert the annual interest rate into the daily interest rate changed to 365. The daily interest rate is now 0.01205479% on debit balances & 0.00684932% on credit balances.

 

(e) Calculated interest on 23/01/2005 because it was the last day before the balance of principal changed on 24/01/2005. Interest on $950.05 (principal) at 4.4% per annum × 23 days (01/01/2005 to 23/01/2005 inclusive) ÷ 365 (days per year) is $2.63, resulting in a new unpaid interest balance of $21.93 ($19.30 plus $2.63).

 

(f) Debit on 24/01/2005: "Invoice No. 505" $1,482.18. The entire amount was added to principal, leaving a new principal balance of $2,432.23 ($950.05 plus $1,482.18).

 

(g) Calculated interest on 04/05/2005 because it was the last day before the interest rate changed on 05/05/2005. Interest on $2,432.23 (principal) at 4.62% per annum × 101 days (24/01/2005 to 04/05/2005 inclusive) ÷ 365 (days per year) is $31.09, resulting in a new unpaid interest balance of $53.02 ($21.93 plus $31.09).

 

(h) On 05/05/2005 the interest rate on debit balances changed to amount-dependent rates (namely 5.5% from $0.00, then 5.72% from $2,000.00, then 5.94% from $4,000.00, then 6.16% from $6,000.00, then 6.38% from $8,000.00).

 

(i) Calculated interest on 11/10/2005 because it was the last day before the balance of principal changed on 12/10/2005. Interest on $2,432.23 (principal) at 5.72% per annum × 160 days (05/05/2005 to 11/10/2005 inclusive) ÷ 365 (days per year) is $60.99, resulting in a new unpaid interest balance of $114.01 ($53.02 plus $60.99).

 

(j) Credit on 12/10/2005: "Cheque No. 439758" $2,772.83CR. The payment was applied partly to interest ($114.01) and partly to principal ($2,658.82) leaving a new unpaid interest balance of $0.00 ($114.01 minus $114.01) and a new principal balance of $226.59CR ($2,432.23 minus $2,658.82).

 

(k) Calculated interest on 04/11/2005 because it was the last day before the balance of principal changed on 05/11/2005. Interest on $226.59CR (principal) at 2.5% per annum × 24 days (12/10/2005 to 04/11/2005 inclusive) ÷ 365 (days per year) is $0.37CR, resulting in a new unpaid interest balance of $0.37CR ($0.00 plus $0.37CR).

 

(l) Debit on 05/11/2005: "Invoice No. 506" $1,313.14. The amount was applied partly to interest ($0.37) and partly to principal ($1,312.77) leaving a new unpaid interest balance of $0.00 ($0.37CR plus $0.37) and a new principal balance of $1,086.18 ($226.59CR plus $1,312.77).

 

(m) Calculated interest on 10/11/2005 because it was the last day before the balance of principal changed on 11/11/2005. Interest on $1,086.18 (principal) at 5.5% per annum × 6 days (05/11/2005 to 10/11/2005 inclusive) ÷ 365 (days per year) is $0.98, resulting in a new unpaid interest balance of $0.98 ($0.00 plus $0.98).

 

(n) Debit on 11/11/2005: "Dishonoured Cheque Fee" $50.00. The entire amount was added to principal, leaving a new principal balance of $1,136.18 ($1,086.18 plus $50.00).

 

(o) Calculated interest on 13/01/2006 because it was the last day before the balance of principal changed on 14/01/2006. Interest on $1,136.18 (principal) at 5.5% per annum × 64 days (11/11/2005 to 13/01/2006 inclusive) ÷ 365 (days per year) is $10.96, resulting in a new unpaid interest balance of $11.94 ($0.98 plus $10.96).

 

(p) Debit on 14/01/2006: "Invoice No. 507" $3,071.38. The entire amount was added to principal, leaving a new principal balance of $4,207.56 ($1,136.18 plus $3,071.38).

 

(q) Calculated interest on 09/04/2006 because it was the last day before the balance of principal changed on 10/04/2006. Interest on $4,207.56 (principal) at 5.94% per annum × 86 days (14/01/2006 to 09/04/2006 inclusive) ÷ 365 (days per year) is $58.89, resulting in a new unpaid interest balance of $70.83 ($11.94 plus $58.89).

 

 

 

 

(r) Credit on 10/04/2006: "Cheque No. 439759" $2,950.00CR. The payment was applied entirely to principal, leaving a new principal balance of $1,257.56 ($4,207.56 minus $2,950.00).

 

(s) Calculated interest on 25/05/2006 because it was the last day before the balance of principal changed on 26/05/2006. Interest on $1,257.56 (principal) at 5.5% per annum × 46 days (10/04/2006 to 25/05/2006 inclusive) ÷ 365 (days per year) is $8.72, resulting in a new unpaid interest balance of $79.55 ($70.83 plus $8.72).

 

(t) Debit on 26/05/2006: "Invoice No. 508" $7,076.15. The entire amount was added to principal, leaving a new principal balance of $8,333.71 ($1,257.56 plus $7,076.15).

 

(u) Calculated interest on 05/06/2006 because it was the last day before the interest rate changed on 06/06/2006. Interest on $8,333.71 (principal) at 6.38% per annum × 11 days (26/05/2006 to 05/06/2006 inclusive) ÷ 365 (days per year) is $16.02, resulting in a new unpaid interest balance of $95.57 ($79.55 plus $16.02).

 

(v) On 06/06/2006 the interest rate on debit balances changed to amount-dependent rates (namely 6.6% from $0.00, then 6.82% from $2,000.00, then 7.04% from $4,000.00, then 7.26% from $6,000.00, then 7.48% from $8,000.00).

 

(w) Calculated interest on 14/07/2006 because it was the last day before the balance of principal changed on 15/07/2006. Interest on $8,333.71 (principal) at 7.48% per annum × 39 days (06/06/2006 to 14/07/2006 inclusive) ÷ 365 (days per year) is $66.61, resulting in a new unpaid interest balance of $162.18 ($95.57 plus $66.61).

 

(x) Credit on 15/07/2006: "Cheque No. 439760" $1,447.98CR. The payment was applied entirely to principal, leaving a new principal balance of $6,885.73 ($8,333.71 minus $1,447.98).

 

(y) Calculated interest on 22/11/2006 because it was the last day before the balance of principal changed on 23/11/2006. Interest on $6,885.73 (principal) at 7.26% per annum × 131 days (15/07/2006 to 22/11/2006 inclusive) ÷ 365 (days per year) is $179.42, resulting in a new unpaid interest balance of $341.60 ($162.18 plus $179.42).

 

(z) Credit on 23/11/2006: "Cheque No. 439761" $67.74CR. The payment was applied entirely to principal, leaving a new principal balance of $6,817.99 ($6,885.73 minus $67.74).

 

(aa) Calculated interest on 06/07/2007 because it was the last day before the interest rate changed on 07/07/2007. Interest on $6,817.99 (principal) at 7.26% per annum × 226 days (23/11/2006 to 06/07/2007 inclusive) ÷ 365 (days per year) is $306.48, resulting in a new unpaid interest balance of $648.08 ($341.60 plus $306.48).

 

(ab) On 07/07/2007 the interest rate on debit balances changed to amount-dependent rates (namely 7.7% from $0.00, then 7.92% from $2,000.00, then 8.14% from $4,000.00, then 8.36% from $6,000.00, then 8.58% from $8,000.00).

 

(ac) Calculated interest on 21/09/2007. Interest on $6,817.99 (principal) at 8.36% per annum × 77 days (07/07/2007 to 21/09/2007 inclusive) ÷ 365 (days per year) is $120.24, resulting in a new unpaid interest balance of $768.32 ($648.08 plus $120.24).

 

(ad) As at 21/09/2007 the total amount owing is seven thousand five hundred and eighty-six dollars and thirty-one cents ($7,586.31) comprised of principal of six thousand eight hundred and seventeen dollars and ninety-nine cents ($6,817.99) and accumulated interest of seven hundred and sixty-eight dollars and thirty-two cents ($768.32).

 

(ae) Total interest for the period 16/07/2004 to 21/09/2007 (1163 days) was eight hundred and eighty-one dollars and ninety-six cents ($881.96).

 

(af) Interest on $6,817.99 continues to accumulate at one dollar and fifty-six cents ($1.56) per day on and from 22/09/2007.

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Calculation Result

Example 15

 

TRANSACTION HISTORY BEFORE INTEREST IS TAKEN INTO ACCOUNT

DATE	DESCRIPTION	AMOUNT	BALANCE
16/07/2004	Invoice No. 504	$950.05	$950.05
24/01/2005	Invoice No. 505	$1,482.18	$2,432.23
12/10/2005	Cheque No. 439758	$2,772.83CR	$340.60CR
05/11/2005	Invoice No. 506	$1,313.14	$972.54
11/11/2005	Dishonoured Cheque Fee	$50.00	$1,022.54
14/01/2006	Invoice No. 507	$3,071.38	$4,093.92
10/04/2006	Cheque No. 439759	$2,950.00CR	$1,143.92
26/05/2006	Invoice No. 508	$7,076.15	$8,220.07
15/07/2006	Cheque No. 439760	$1,447.98CR	$6,772.09
23/11/2006	Cheque No. 439761	$67.74CR	$6,704.35

 

 

 

INTEREST CALCULATION TABLE

DATE	DESCRIPTION	DAYS	AMOUNT	BALANCE	PRINCIPAL	INTEREST
16/07/2004	Interest rate started at 4.4% on debit balances & 2.5% on credit balances (0.01202186% & 0.0068306% per day).			$950.05DR	$950.05DR	$0.00DR
31/12/2004	Interest (16/07/2004 to 31/12/2004 inclusive) $950.05 × 0.01202186% × 169 days = $19.30.	169	$19.30DR	$969.35DR	$950.05DR	$19.30DR
01/01/2005	Days per year changed to 365. Daily interest rate now 0.01205479% on debit balances & 0.00684932% on credit balances.			$969.35DR	$950.05DR	$19.30DR
23/01/2005	Interest (01/01/2005 to 23/01/2005 inclusive) $950.05 × 0.01205479% × 23 days = $2.63.	23	$2.63DR	$971.98DR	$950.05DR	$21.93DR
24/01/2005	Invoice No. 505. Entire amount added to principal.		$1,482.18DR	$2,454.16DR	$2,432.23DR	$21.93DR
04/05/2005	Interest (24/01/2005 to 04/05/2005 inclusive) $2,432.23 × 0.01265753% × 101 days = $31.09.	101	$31.09DR	$2,485.25DR	$2,432.23DR	$53.02DR
05/05/2005	Interest rate on debit balances changed to amount-dependent rates (namely 5.5% from $0.00, then 5.72% from $2,000.00, then 5.94% from $4,000.00, then 6.16% from $6,000.00, then 6.38% from $8,000.00) (currently 0.01567123% per day).			$2,485.25DR	$2,432.23DR	$53.02DR
11/10/2005	Interest (05/05/2005 to 11/10/2005 inclusive) $2,432.23 × 0.01567123% × 160 days = $60.99.	160	$60.99DR	$2,546.24DR	$2,432.23DR	$114.01DR
12/10/2005	Cheque No. 439758. Payment was applied partly to interest ($114.01) and partly to principal ($2,658.82).		$2,772.83CR	$226.59CR	$226.59CR	$0.00DR
04/11/2005	Interest (12/10/2005 to 04/11/2005 inclusive) $226.59CR × 0.00684932% × 24 days = $0.37CR.	24	$0.37CR	$226.96CR	$226.59CR	$0.37CR
05/11/2005	Invoice No. 506. Payment was applied partly to interest ($0.37) and partly to principal ($1,312.77).		$1,313.14DR	$1,086.18DR	$1,086.18DR	$0.00DR
10/11/2005	Interest (05/11/2005 to 10/11/2005 inclusive) $1,086.18 × 0.01506849% × 6 days = $0.98.	6	$0.98DR	$1,087.16DR	$1,086.18DR	$0.98DR
11/11/2005	Dishonoured Cheque Fee. Entire amount added to principal.		$50.00DR	$1,137.16DR	$1,136.18DR	$0.98DR
13/01/2006	Interest (11/11/2005 to 13/01/2006 inclusive) $1,136.18 × 0.01506849% × 64 days = $10.96.	64	$10.96DR	$1,148.12DR	$1,136.18DR	$11.94DR
14/01/2006	Invoice No. 507. Entire amount added to principal.		$3,071.38DR	$4,219.50DR	$4,207.56DR	$11.94DR
09/04/2006	Interest (14/01/2006 to 09/04/2006 inclusive) $4,207.56 × 0.01627397% × 86 days = $58.89.	86	$58.89DR	$4,278.39DR	$4,207.56DR	$70.83DR
10/04/2006	Cheque No. 439759. Payment applied entirely to principal.		$2,950.00CR	$1,328.39DR	$1,257.56DR	$70.83DR
25/05/2006	Interest (10/04/2006 to 25/05/2006 inclusive) $1,257.56 × 0.01506849% × 46 days = $8.72.	46	$8.72DR	$1,337.11DR	$1,257.56DR	$79.55DR
26/05/2006	Invoice No. 508. Entire amount added to principal.		$7,076.15DR	$8,413.26DR	$8,333.71DR	$79.55DR
05/06/2006	Interest (26/05/2006 to 05/06/2006 inclusive) $8,333.71 × 0.01747945% × 11 days = $16.02.	11	$16.02DR	$8,429.28DR	$8,333.71DR	$95.57DR
06/06/2006	Interest rate on debit balances changed to amount-dependent rates (namely 6.6% from $0.00, then 6.82% from $2,000.00, then 7.04% from $4,000.00, then 7.26% from $6,000.00, then 7.48% from $8,000.00) (currently 0.02049315% per day).			$8,429.28DR	$8,333.71DR	$95.57DR
14/07/2006	Interest (06/06/2006 to 14/07/2006 inclusive) $8,333.71 × 0.02049315% × 39 days = $66.61.	39	$66.61DR	$8,495.89DR	$8,333.71DR	$162.18DR
15/07/2006	Cheque No. 439760. Payment applied entirely to principal.		$1,447.98CR	$7,047.91DR	$6,885.73DR	$162.18DR
22/11/2006	Interest (15/07/2006 to 22/11/2006 inclusive) $6,885.73 × 0.01989041% × 131 days = $179.42.	131	$179.42DR	$7,227.33DR	$6,885.73DR	$341.60DR
23/11/2006	Cheque No. 439761. Payment applied entirely to principal.		$67.74CR	$7,159.59DR	$6,817.99DR	$341.60DR
06/07/2007	Interest (23/11/2006 to 06/07/2007 inclusive) $6,817.99 × 0.01989041% × 226 days = $306.48.	226	$306.48DR	$7,466.07DR	$6,817.99DR	$648.08DR
07/07/2007	Interest rate on debit balances changed to amount-dependent rates (namely 7.7% from $0.00, then 7.92% from $2,000.00, then 8.14% from $4,000.00, then 8.36% from $6,000.00, then 8.58% from $8,000.00) (currently 0.02290411% per day).			$7,466.07DR	$6,817.99DR	$648.08DR
21/09/2007	Interest (07/07/2007 to 21/09/2007 inclusive) $6,817.99 × 0.02290411% × 77 days = $120.24.	77	$120.24DR	$7,586.31DR	$6,817.99DR	$768.32DR
	Final Balance	1163		$7,586.31DR	$6,817.99DR	$768.32DR

 

 

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Calculation Notes

 

The following information is provided to give you a complete understanding of the calculation, so even the finest details are available if ever needed.

 

1. The debit interest rates have been taken from the debit rates file (my overdraft rate no 2).

 

2. The main calculation options (such as days per year, credit application order and rounding) have been taken from the debit rates file where they are embedded as part of the rates specification. These options can be changed for individual calculations in Settings|Options, or for all new cases in Settings|Setup.

 

3. The credit interest rates (if required) have been taken from the settings on the main form.

 

4. The debit file rate definition has been partially modified (overridden) on the main form.

 

 

 

 

5. In Settings|Options you have selected the setting that tends to be best for the debtor (i.e. the person who owes the money). It applies any payments against principal before it applies payments against interest. This reduces the amount of principal on which interest is calculated more quickly than other options, thus reducing the total amount of interest.

 

6. Decimal Rounding. When converting from an annual rate of interest to a daily rate of interest, and except if overridden in an interest rates file, the program has rounded-up to 8 decimal places, eg 8.12512324924555 is rounded to 8.12512325%. You can change the setting in Settings|Options.

 

7. Calendar Year. You are using the "Calendar Year" method for converting the annual interest rate to the daily interest rate. In many cases this is the most accurate setting but you should be aware that it adds complexity to the calculation report because it requires additional interest calculations before and after each leap year. If you require a simpler report and it is appropriate to do so then choose a different setting. The setting is either embedded in the Options section of the selected interest rate file or else it is set in Settings|Options on the main form. In either case you can change or override the setting for a particular calculation in Settings|Options. Please note that such settings only apply to the current calculation. You can change the default value that affects all new calculations in Settings|Setup. The default value cannot however automatically override any setting in the Options part of an interest rate file - you still have to override on an individual basis as explained above.