Example 12: Transactions with File Rate of interest that changes by amount and date, Static rate of interest on Credits
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Example 12: Transactions with File Rate of interest that changes by amount and date, Static rate of interest on Credits |
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Example 12 Scenario
This example is based on the facts in Example 11. See entire scenario below for full version.
In the previous example:
| • | The interest rate corresponded to the store's own bank overdraft rate from time to time. |
| • | The rate changed only according to the date. |
In this example:
| • | The overdraft rate changes according to the amount of principal as well as by date. |
| • | The overdraft rate base is increased as follows: |
Balances Over Additional Rate
$0 0.0%
$2,000 0.2%
$4,000 0.4%
$6,000 0.6%
$8,000 0.8%
Demonstrated Features
| ► | How to enter tiers that depend on amount as well as date. |
| ► | Examine relevant parts of the calculation result. |
Points of Interest
| ◆ | Interest rates can vary according to amount as well as date. |
| ◆ | You can have completely different interest rates for debit, and credit, balance. |
| ◆ | The program always sets out rate changes. |
| ◆ | It always applies the correct interest bracket rate. |
Multimedia Presentation
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Click icon to watch video |
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. The rates 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 store (i.e. the creditor).
We wish to calculate interest as at 21 September 2007.
Calculation Results
The results generated by the program are shown below.
Calculation Result
Example 12
SUMMARY
| • | Calculated interest on transactions, starting with principal of nine hundred and fifty dollars and five cents ($950.05), for the period 16/07/2004 to 21/09/2007 inclusive, a period of 1163 days. |
| • | Total interest for the period was eight hundred and seventeen dollars and twenty-five cents ($817.25), however the amount now owing is four hundred and ninety-eight dollars and twenty-four cents ($498.24) because of the allocation of debits/credits during the period. |
| • | As at 21/09/2007 the total amount owing is seven thousand five hundred and twenty-one dollars and sixty cents ($7,521.60) comprised of principal of seven thousand and twenty-three dollars and thirty-six cents ($7,023.36) and accumulated interest of four hundred and ninety-eight dollars and twenty-four cents ($498.24). |
| • | Interest on $7,023.36 continues to accumulate at one dollar and forty-six cents ($1.46) per day on and from 22/09/2007. |
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
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(a) On 16/07/2004 the opening principal was $950.05, the interest rate on debit balances was amount-dependent rates (namely 4% from $0.00, then 4.2% from $2,000.00, then 4.4% from $4,000.00, then 4.6% from $6,000.00, then 4.8% 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 non-principal then to interest then to principal.
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(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% per annum × 169 days (16/07/2004 to 31/12/2004 inclusive) ÷ 366 (days per year) is $17.55, resulting in a new unpaid interest balance of $17.55 ($0.00 plus $17.55).
(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 0.0109589% 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% per annum × 23 days (01/01/2005 to 23/01/2005 inclusive) ÷ 365 (days per year) is $2.39, resulting in a new unpaid interest balance of $19.94 ($17.55 plus $2.39).
(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).
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(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 4.2% per annum × 101 days (24/01/2005 to 04/05/2005 inclusive) ÷ 365 (days per year) is $28.27, resulting in a new unpaid interest balance of $48.21 ($19.94 plus $28.27).
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(h) On 05/05/2005 the interest rate on debit balances changed to amount-dependent rates (namely 5% from $0.00, then 5.2% from $2,000.00, then 5.4% from $4,000.00, then 5.6% from $6,000.00, then 5.8% 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 5.2% per annum × 160 days (05/05/2005 to 11/10/2005 inclusive) ÷ 365 (days per year) is $55.44, resulting in a new unpaid interest balance of $103.65 ($48.21 plus $55.44).
(j) Credit on 12/10/2005: "Cheque No. 439758" $2,772.83CR. The payment was applied partly to interest ($103.65) and partly to principal ($2,669.18) leaving a new unpaid interest balance of $0.00 ($103.65 minus $103.65) and a new principal balance of $236.95CR ($2,432.23 minus $2,669.18).
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(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 $236.95CR (principal) at 2.5% per annum × 24 days (12/10/2005 to 04/11/2005 inclusive) ÷ 365 (days per year) is $0.39CR, resulting in a new unpaid interest balance of $0.39CR ($0.00 plus $0.39CR).
(l) Debit on 05/11/2005: "Invoice No. 506" $1,313.14. The amount was applied partly to interest ($0.39) and partly to principal ($1,312.75) leaving a new unpaid interest balance of $0.00 ($0.39CR plus $0.39) and a new principal balance of $1,075.80 ($236.95CR plus $1,312.75).
(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 $1,075.80 (principal) at 5% per annum × 6 days (05/11/2005 to 10/11/2005 inclusive) ÷ 365 (days per year) is $0.88, resulting in a new unpaid interest balance of $0.88 ($0.00 plus $0.88).
(n) Debit on 11/11/2005: "Dishonoured Cheque Fee" $50.00. The entire amount was added to principal, leaving a new principal balance of $1,125.80 ($1,075.80 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 $1,125.80 (principal) at 5% per annum × 64 days (11/11/2005 to 13/01/2006 inclusive) ÷ 365 (days per year) is $9.87, resulting in a new unpaid interest balance of $10.75 ($0.88 plus $9.87).
(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 $4,197.18 ($1,125.80 plus $3,071.38).
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(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 $4,197.18 (principal) at 5.4% per annum × 86 days (14/01/2006 to 09/04/2006 inclusive) ÷ 365 (days per year) is $53.40, resulting in a new unpaid interest balance of $64.15 ($10.75 plus $53.40).
(r) Credit on 10/04/2006: "Cheque No. 439759" $2,950.00CR. The payment was applied partly to interest ($64.15) and partly to principal ($2,885.85) leaving a new unpaid interest balance of $0.00 ($64.15 minus $64.15) and a new principal balance of $1,311.33 ($4,197.18 minus $2,885.85).
(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 $1,311.33 (principal) at 5% per annum × 46 days (10/04/2006 to 25/05/2006 inclusive) ÷ 365 (days per year) is $8.26, resulting in a new unpaid interest balance of $8.26 ($0.00 plus $8.26).
(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 $8,387.48 ($1,311.33 plus $7,076.15).
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(u) Calculated interest on 05/06/2006 because it was the last day before the interest rate changed on 06/06/2006. Interest on $8,387.48 (principal) at 5.8% per annum × 11 days (26/05/2006 to 05/06/2006 inclusive) ÷ 365 (days per year) is $14.66, resulting in a new unpaid interest balance of $22.92 ($8.26 plus $14.66).
(v) On 06/06/2006 the interest rate on debit balances changed to amount-dependent rates (namely 6% from $0.00, then 6.2% from $2,000.00, then 6.4% from $4,000.00, then 6.6% from $6,000.00, then 6.8% 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 $8,387.48 (principal) at 6.8% per annum × 39 days (06/06/2006 to 14/07/2006 inclusive) ÷ 365 (days per year) is $60.94, resulting in a new unpaid interest balance of $83.86 ($22.92 plus $60.94).
(x) Credit on 15/07/2006: "Cheque No. 439760" $1,447.98CR. The payment was applied partly to interest ($83.86) and partly to principal ($1,364.12) leaving a new unpaid interest balance of $0.00 ($83.86 minus $83.86) and a new principal balance of $7,023.36 ($8,387.48 minus $1,364.12).
(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 $7,023.36 (principal) at 6.6% per annum × 131 days (15/07/2006 to 22/11/2006 inclusive) ÷ 365 (days per year) is $166.37, resulting in a new unpaid interest balance of $166.37 ($0.00 plus $166.37).
(z) Credit on 23/11/2006: "Cheque No. 439761" $67.74CR. The payment was applied entirely to interest, leaving a new unpaid interest balance of $98.63 ($166.37 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 $7,023.36 (principal) at 6.6% per annum × 226 days (23/11/2006 to 06/07/2007 inclusive) ÷ 365 (days per year) is $287.01, resulting in a new unpaid interest balance of $385.64 ($98.63 plus $287.01).
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(ab) On 07/07/2007 the interest rate on debit balances changed to amount-dependent rates (namely 7% from $0.00, then 7.2% from $2,000.00, then 7.4% from $4,000.00, then 7.6% from $6,000.00, then 7.8% from $8,000.00).
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(ac) Calculated interest on 21/09/2007. Interest on $7,023.36 (principal) at 7.6% per annum × 77 days (07/07/2007 to 21/09/2007 inclusive) ÷ 365 (days per year) is $112.60, resulting in a new unpaid interest balance of $498.24 ($385.64 plus $112.60).
(ad) As at 21/09/2007 the total amount owing is seven thousand five hundred and twenty-one dollars and sixty cents ($7,521.60) comprised of principal of seven thousand and twenty-three dollars and thirty-six cents ($7,023.36) and accumulated interest of four hundred and ninety-eight dollars and twenty-four cents ($498.24).
(ae) Total interest for the period 16/07/2004 to 21/09/2007 (1163 days) was eight hundred and seventeen dollars and twenty-five cents ($817.25).
(af) Interest on $7,023.36 continues to accumulate at one dollar and forty-six cents ($1.46) per day on and from 22/09/2007.
Calculation Result
Example 12
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% on debit balances & 2.5% on credit balances (0.01092896% & 0.0068306% per day). | $950.05DR | $950.05DR | $0.00DR | ||
| 31/12/2004 | Interest (16/07/2004 to 31/12/2004 inclusive) $950.05 × 0.01092896% × 169 days = $17.55. | 169 | $17.55DR | $967.60DR | $950.05DR | $17.55DR |
| 01/01/2005 | Days per year changed to 365. Daily interest rate now 0.0109589% on debit balances & 0.00684932% on credit balances. | $967.60DR | $950.05DR | $17.55DR | ||
| 23/01/2005 | Interest (01/01/2005 to 23/01/2005 inclusive) $950.05 × 0.0109589% × 23 days = $2.39. | 23 | $2.39DR | $969.99DR | $950.05DR | $19.94DR |
| 24/01/2005 | Invoice No. 505. Entire amount added to principal. | $1,482.18DR | $2,452.17DR | $2,432.23DR | $19.94DR | |
| 04/05/2005 | Interest (24/01/2005 to 04/05/2005 inclusive) $2,432.23 × 0.01150685% × 101 days = $28.27. | 101 | $28.27DR | $2,480.44DR | $2,432.23DR | $48.21DR |
| 05/05/2005 | Interest rate on debit balances changed to amount-dependent rates (namely 5% from $0.00, then 5.2% from $2,000.00, then 5.4% from $4,000.00, then 5.6% from $6,000.00, then 5.8% from $8,000.00) (currently 0.01424658% per day). | $2,480.44DR | $2,432.23DR | $48.21DR | ||
| 11/10/2005 | Interest (05/05/2005 to 11/10/2005 inclusive) $2,432.23 × 0.01424658% × 160 days = $55.44. | 160 | $55.44DR | $2,535.88DR | $2,432.23DR | $103.65DR |
| 12/10/2005 | Cheque No. 439758. Payment was applied partly to interest ($103.65) and partly to principal ($2,669.18). | $2,772.83CR | $236.95CR | $236.95CR | $0.00DR | |
| 04/11/2005 | Interest (12/10/2005 to 04/11/2005 inclusive) $236.95CR × 0.00684932% × 24 days = $0.39CR. | 24 | $0.39CR | $237.34CR | $236.95CR | $0.39CR |
| 05/11/2005 | Invoice No. 506. Payment was applied partly to interest ($0.39) and partly to principal ($1,312.75). | $1,313.14DR | $1,075.80DR | $1,075.80DR | $0.00DR | |
| 10/11/2005 | Interest (05/11/2005 to 10/11/2005 inclusive) $1,075.80 × 0.01369863% × 6 days = $0.88. | 6 | $0.88DR | $1,076.68DR | $1,075.80DR | $0.88DR |
| 11/11/2005 | Dishonoured Cheque Fee. Entire amount added to principal. | $50.00DR | $1,126.68DR | $1,125.80DR | $0.88DR | |
| 13/01/2006 | Interest (11/11/2005 to 13/01/2006 inclusive) $1,125.80 × 0.01369863% × 64 days = $9.87. | 64 | $9.87DR | $1,136.55DR | $1,125.80DR | $10.75DR |
| 14/01/2006 | Invoice No. 507. Entire amount added to principal. | $3,071.38DR | $4,207.93DR | $4,197.18DR | $10.75DR | |
| 09/04/2006 | Interest (14/01/2006 to 09/04/2006 inclusive) $4,197.18 × 0.01479452% × 86 days = $53.40. | 86 | $53.40DR | $4,261.33DR | $4,197.18DR | $64.15DR |
| 10/04/2006 | Cheque No. 439759. Payment was applied partly to interest ($64.15) and partly to principal ($2,885.85). | $2,950.00CR | $1,311.33DR | $1,311.33DR | $0.00DR | |
| 25/05/2006 | Interest (10/04/2006 to 25/05/2006 inclusive) $1,311.33 × 0.01369863% × 46 days = $8.26. | 46 | $8.26DR | $1,319.59DR | $1,311.33DR | $8.26DR |
| 26/05/2006 | Invoice No. 508. Entire amount added to principal. | $7,076.15DR | $8,395.74DR | $8,387.48DR | $8.26DR | |
| 05/06/2006 | Interest (26/05/2006 to 05/06/2006 inclusive) $8,387.48 × 0.01589041% × 11 days = $14.66. | 11 | $14.66DR | $8,410.40DR | $8,387.48DR | $22.92DR |
| 06/06/2006 | Interest rate on debit balances changed to amount-dependent rates (namely 6% from $0.00, then 6.2% from $2,000.00, then 6.4% from $4,000.00, then 6.6% from $6,000.00, then 6.8% from $8,000.00) (currently 0.01863014% per day). | $8,410.40DR | $8,387.48DR | $22.92DR | ||
| 14/07/2006 | Interest (06/06/2006 to 14/07/2006 inclusive) $8,387.48 × 0.01863014% × 39 days = $60.94. | 39 | $60.94DR | $8,471.34DR | $8,387.48DR | $83.86DR |
| 15/07/2006 | Cheque No. 439760. Payment was applied partly to interest ($83.86) and partly to principal ($1,364.12). | $1,447.98CR | $7,023.36DR | $7,023.36DR | $0.00DR | |
| 22/11/2006 | Interest (15/07/2006 to 22/11/2006 inclusive) $7,023.36 × 0.01808219% × 131 days = $166.37. | 131 | $166.37DR | $7,189.73DR | $7,023.36DR | $166.37DR |
| 23/11/2006 | Cheque No. 439761. Payment applied entirely to interest. | $67.74CR | $7,121.99DR | $7,023.36DR | $98.63DR | |
| 06/07/2007 | Interest (23/11/2006 to 06/07/2007 inclusive) $7,023.36 × 0.01808219% × 226 days = $287.01. | 226 | $287.01DR | $7,409.00DR | $7,023.36DR | $385.64DR |
| 07/07/2007 | Interest rate on debit balances changed to amount-dependent rates (namely 7% from $0.00, then 7.2% from $2,000.00, then 7.4% from $4,000.00, then 7.6% from $6,000.00, then 7.8% from $8,000.00) (currently 0.02082192% per day). | $7,409.00DR | $7,023.36DR | $385.64DR | ||
| 21/09/2007 | Interest (07/07/2007 to 21/09/2007 inclusive) $7,023.36 × 0.02082192% × 77 days = $112.60. | 77 | $112.60DR | $7,521.60DR | $7,023.36DR | $498.24DR |
| Final Balance | 1163 | $7,521.60DR | $7,023.36DR | $498.24DR |
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 rates 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 creditor (i.e. the person who is owed the money). It applies any payments against interest before it applies payments against principal. This keeps the amount of principal on which interest is calculated as high as possible for as long as possible thus maximising 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.
