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Magenta Company purchased a machine from Pink Corporation on October 31, 2018. In payment for the $288,000 purchase, Magenta issued a one-year installment note to be paid in equal monthly payments of $25,588 at the end of each month. The payments include interest at the rate of 12%. The amount of interest expense that Magenta will report in its income statement for the year ended December 31, 2018, is:

(A) $5,760.
(B) $5,533.
(C) $2,559.
(D) $2,880.

1 Answer

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Answer: Option B

Explanation: This could be calculated as follows :-


Interest\:expense\:for\:nov\:30\:2018=\:\$288,000* (12\%)/(12)

= $2880

Principal repayment for the month = $25,588 - $2880

= $22,708

similarly:-


Interest\:expense\:for\:dec\:31\:2018=\:(\$288000-\$22,708)* (12\%)/(12) =\:$2653

therefore,

total interest expense = 2880 +2653 =$5,533

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