Step-by-step explanation:
To calculate the interest expense for Lilac Company in its income statement for the year ended December 31, 2021, we need to determine the interest portion of the monthly payments on the installment note.
Given:
Principal amount of the installment note: $298,000
Monthly payment: $26,477
Interest rate: 12% (annual rate)
To calculate the interest portion of each monthly payment, we can use the formula:
Interest Expense = Outstanding Principal Balance × Monthly Interest Rate
The monthly interest rate can be found by dividing the annual interest rate by 12 (since there are 12 months in a year).
Monthly Interest Rate = Annual Interest Rate / 12
Monthly Interest Rate = 12% / 12
Monthly Interest Rate = 1%
Now, let's calculate the interest expense for the first month (October 2021):
Interest Expense (October 2021) = Outstanding Principal Balance (October 2021) × Monthly Interest Rate
Since the machine was purchased on October 31, 2021, there is no outstanding principal balance at the end of October. Therefore, the interest expense for October 2021 is $0.
The amount of interest expense that Lilac will report in its income statement for the year ended December 31, 2021, will be the interest expense for the remaining months (November and December).
Interest Expense (November 2021) = Outstanding Principal Balance (November 2021) × Monthly Interest Rate
The outstanding principal balance for November 2021 can be calculated by subtracting the principal portion of the first monthly payment from the initial principal amount:
Outstanding Principal Balance (November 2021) = Principal Amount - Principal Portion of the First Monthly Payment
Principal Portion of the First Monthly Payment = Monthly Payment - Interest Expense (October 2021)
Principal Portion of the First Monthly Payment = $26,477 - $0
Principal Portion of the First Monthly Payment = $26,477
Outstanding Principal Balance (November 2021) = $298,000 - $26,477
Outstanding Principal Balance (November 2021) = $271,523
Interest Expense (November 2021) = $271,523 × Monthly Interest Rate
Interest Expense (November 2021) = $271,523 × 1%
Interest Expense (November 2021) = $2,715.23 (rounded to the nearest cent)
Since the payment for December 2021 will be the last payment, the outstanding principal balance at the end of December will be $0. Therefore, the interest expense for December 2021 will also be $0.
Therefore, the total interest expense that Lilac will report in its income statement for the year ended December 31, 2021, is $2,715.23.
From the given multiple-choice options, the closest value is $2,725.