Question

on january 1, 2024, a company acquired land for $6.6 million. the company paid $1.4 million in cash and signed a 7% note requiring the company to pay the remaining $5.2 million plus interest on december 31, 2025. an interest rate of 7% properly reflects the time value of money for this type of loan agreement. what amount of interest expense would the company record on december 31, 2025 (two years later)? multiple choice $364,000 $753,480 $728,000 $389,480

Answer 1

The company would record an interest expense of $728,000 on December 31, 2025. Therefore, the correct option is C

Step-by-step explanation:

When a company acquires land and pays for it partially in cash and partially through a note, the interest expense is calculated based on the prevailing interest rate and the remaining amount to be paid at the end of the term.

In this case, the company acquired land for $6.6 million, paid $1.4 million in cash, and signed a note for $5.2 million to be paid on December 31, 2025, with an interest rate of 7%.

To calculate the interest expense, we need to find the interest on the remaining amount over the two-year period.

Using the formula:

Interest = Principal x Interest Rate x Time,

the interest expense would be:

$5.2 million x 7% x 2 = $728,000.