Question

On March 1, Homer plans to borrow $550,000 from the United Community Bank by signing a 6%, 15-year note payable. The note calls for 180 monthly payments of $3,000, which includes both interest and principal components.

Homer's budgeted interest expense for March is:
A. $250.
B. $1,222.
C. $2,750.
D. $3,000.

Answer 1

Homer's budgeted interest expense for March from the 6%, 15-year note payable is $2,750, calculated from the first month's interest portion of the payment. Option C

Step-by-step explanation:

To calculate Homer's budgeted interest expense for March, we must determine how much interest is part of the first monthly payment. The interest for the first month is calculated as the product of the annual interest rate and the principal, divided by 12 (because it is a monthly payment). Using the formula Interest = Principal × Annual Interest Rate ÷ (1/12), we get:

Interest = $550,000 × 6% × (1/12) = $550,000 × 0.06 × 0.08333 = $2,750.

Therefore, Homer's budgeted interest expense for March is $2,750. Option C