Question

Hello. I need help figuring out interest expense for 2020. Interest expense in 2019 totaled 6,750.

Here is the information for the question:

Clark convinced his parents to loan the new venture $120,000 in cash, with principal payable at the rate of $12,000 per year over ten years and interest payable at a rate of 7.5 percent on the outstanding balance as of the beginning of the loan’s year. The loan agreement was signed on March 31, 2019, and provided that both principal and interest would be paid only once a year on March 31.

Answer 1

The outstanding balance at the start of 2020 was $108,000. Using an interest rate of 7.5%, the interest expense for 2020 is $8,100.

we need to know the loan's outstanding balance in order to compute the interest expense for that year. According to the loan arrangement, principle and interest are paid on March 31 of each year. This implies that on March 31, 2020, $12,000 of the loan's principle was paid off, lowering the loan's remaining balance. We can use the following calculation to get the interest expense for 2020: Outstanding Balance at the start of the year multiplied by the interest rate equals interest expense.

On March 31, 2020, $12,000 in principal was paid off, leaving a balance of $120,000 minus $12,000, or $108,000, at the start of 2020. We may determine the interest expense for 2020 using the interest rate of 7.5 percent.