Question

Currie Company borrowed $22,000 from Sierra Bank by issuing a 11% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $5,221. Based on this information, what is the amount of the interest expense associated with the second payment? (Round your answer to the nearest dollar.)

a. $5,221
b. $1,571
c. $2,112
d. $2,420
e. None of the above.

Answer 1

The interest expense on the second payment of Currie Company's loan is $1,571, calculated by determining the remaining principal after the first year and applying the interest rate to it.

Step-by-step explanation:

The amount of interest expense associated with the second payment made by Currie Company for the 11% three-year note is $1,571. This is determined by first calculating the remaining principal after the first payment, then applying the interest rate to this amount. After the first payment of $5,221, a portion goes towards interest and the rest towards the principal.

The interest for the first year is $2,420 (11% of $22,000). Therefore, the principal payment in the first year is $5,221 - $2,420 = $2,801. The new principal is $22,000 - $2,801 = $19,199. The interest for the second year is 11% of the new principal, which is 0.11 × $19,199, rounding to the nearest dollar equals $1,571.