During February 2016, John Smith financed the purchase of his new home by borrowing $250,000 from the Bank of America (BA). Although he was offered a conventional 30-year loan at a fixed rate of 5.4 percent, Mr. Smith chose BA\'s “5/30” variable rate mortgage with an initial interest rate of 3.0 percent. The “5/30” requires Mr. Smith to pay off his loan over 30 years. However, the first 60 monthly mortgage payments are determined as if the loan were to be amortized (paid off) over 30 years at a fixed rate of 3.0 percent. At the end of 5 years (60 payments) the interest rate on the loan will be reset to the market interest rate, with the monthly mortgage payment being adjusted so that the outstanding balance of the loan will be paid off over the remaining 25-year loan term. Assume that a resurgence of inflation causes a dramatic increase in interest rates, so that during February 2021 the interest rate on Mr. Smith’s loan must be reset to 7.8 percent. Determine the amount of Mr. Smith’s new monthly payment when the interest rate on his loan is reset in February 2021. Solution Initial Table:- New Table:-Principal250,000Interest Rate3%Years30Total Compounded Interest for 30 years257,500Total (Principal + Interest)507,500EMI1410 (round off from 1409.7).

1. During Gates Company’s first two years of operations, the company reported absorption costing
net operating income as follows:
Year 1
Year 2
Sales (@ $62 per unit)
$
992,000
$
1,612,000
Cost of goods sold (@ $38 per unit)
608,000
988,000
Gross margin
384,000
624,000
Selling and administrative expenses*
296,000
326,000
Net operating income
$
88,000
$
298,000
* $3 per unit variable; $248,000 fixed each year.
The company’s $38 unit product cost is computed as follows:
Direct materials
$
7
Direct labor
12
Variable manufacturing overhead
2
Fixed manufacturing overhead ($357,000 ÷ 21,000 units)
17
Absorption costing unit product cost

2. $
38
Production and cost data for the two years are given below:
Year 1
Year 2
Units produced
21,000
21,000
Units sold
16,000
26,000
Required:
1.
Prepare a variable costing contribution format income statement for each year.
2.
Reconcile the absorption costing and variable costing net operating income figures for each year.
(Loss and deduction amounts should be indicated with a minus sign.)
During Gates Company’s first two years of operations, the company reported absorption costing
net operating income as follows:
Solution
1.Prepare a variable costing contribution format income statement for each year.
2.Reconcile the absorption costing and variable costing net operating income figures for each
year. (Loss and deduction amounts should be indicated with a minus sign.)
Working
Fixed manufacturing overhead expensed with absorption costing in year 1 = 17*16000 = 272000
Fixed manufacturing overhead expensed with absorption costing in year 2 = 17*26000 = 442000
Variable Costing Income StatementYear 1Year 2Sales 992,000
1,612,000Variable expenses:Cost of goods sold (Unit Sold @$ 21) 336,000
546,000Variable selling and admin expenses (Unit Sold @$ 3)
48,000 78,000Total Variable expenses 384,000
624,000Contribution Margin 608,000 988,000Fixed expenses:Fixed
manufacturing overhead 357,000 357,000Fixed selling and admin
expenses 248,000 248,000Total Fixed expenses 605,000

3. 605,000Net Operating Income 3,000 383,000