Question

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 payments of $14,903 at the end of each year. How much of the first $14,903 payment was applied to interest in Year 2?

Answer 1

To determine how much of the second $14,903 installment payment was applied to interest in Year 2, you must first calculate the interest on the remaining principal after the first payment. The interest portion would be $7,447.76, calculated as 8% of the reduced principal of $93,097 following the first payment.

Step-by-step explanation:

The student asked how much of the first $14,903 payment on an installment note was applied to interest in Year 2. To calculate interest on an installment loan, you need to know the remaining balance of the loan. Initially, the loan is for $100,000 at an 8 percent interest rate. For the first year, the interest would be $100,000 * 0.08 = $8,000. From the first payment of $14,903, after paying off the $8,000 interest, the remaining $6,903 reduces the principal to $93,097.

For Year 2, the interest is now calculated on the new principal amount: $93,097 * 0.08 = $7,447.76. Hence, for the second payment, $7,447.76 of $14,903 would be applied to interest, with the remainder reducing the principal further.