Question

Shortt & Tall, Attorneys at Law, opened their firm with $30,000 cash from investors and a $20,000 loan. During the first year of operations, the firm earned $4,000 of revenue and incurred $1,000 in operating expenses. Shortt & Tall repaid $12,000 in principal, and paid 10% interest on the balance outstanding at the end of the year.

How much interest did Shortt & Tall pay in Year 1?

Answer 1

Shortt & Tall paid $800 of interest in Year 1.

Step-by-step explanation:

Shortt & Tall, Attorneys at Law, opened their firm with $30,000 cash from investors and a $20,000 loan. During the first year of operations, the firm earned $4,000 of revenue and incurred $1,000 in operating expenses. To calculate the interest paid by Shortt & Tall in Year 1, we need to find the balance outstanding at the end of the year.

The loan was repaid with $12,000 principal, so the balance outstanding is the original loan amount of $20,000 minus the principal repaid: $20,000 - $12,000 = $8,000. The interest paid on the balance outstanding is 10% of $8,000, which is $800.