Question

Peachtree Company borrows $30,000 from the local bank at 7% interest. The term of the note is five years, and the annual payments remain constant at $7,317. Determine the interest expense Peachtree Company should record in the second year.

a. $1,735
b. $2,100
c. $7,317
d. $5,217

Answer 1

a. $1,735

Step-by-step explanation:

Year 1;

$30,000 is the loan amount borrowed(Principal) which means that it is the beginning balance.

If payment per year = $7,317,

Portion of PMT that goes towards Interest expense = 7%*30,000 = $2,100

Portion of PMT that goes towards Principal payment = $7,317 - $2,100 = $5,217

Ending balance yr 1 = $30,000 - $5,217 = $24,783

Year 2;

Beginning balance = $24,783

Payment per year = $7,317

Portion of PMT that goes towards Interest expense = 7% *$24,783 = $1,734.81

Therefore, interest expense that Peachtree Company should record in the second year is $1,735