Question

Sabrina Company borrowed $225,000 to buy an equipment on January 1, 2019, and signed a 7% instalment note requiring annual equal payments of $24,704, including principal and interest at the end of every year for 15 years. Rounded to the nearest dollar, determine the balance in the Instalment Note Payable account on January 1, 2021, after making the first two annual payments.

a. $189,613.
b. $206,466.
c. $199.194.
d. $216,046.

Answer 1

The correct option is b. $206,466.

Step-by-step explanation:

Interest expense on December 31, 2019 = Note payable on January 1, 2019 * Interest rate = $225,000 * 7% = $15,750

Principal paid on December 31, 2019 = Annual fixed installment - Interest expense on December 31, 2019 = $24,704 - $15,750 = $8,954

Note Payable balance on January 1, 2020 = Note payable on January 1, 2019 - Principal paid on December 31, 2019 = $225,000 - $8,954 = $216,046

Interest expense on December 31, 2020 = Note payable on January 1, 2020 * Interest rate =$216,046 * 7% = $15,123

Principal paid on December 31, 2020 = Annual fixed installment - Interest expense on December 31, 2020 = $24,704 - $15,123 = $9,581

Note Payable balance on January 1, 2021 = Note payable balance on January 1, 2020 - Principal paid on December 31, 2020 = $216,046 - $9,581 = 206,465

From the options in the question, the closest one to the Note Payable balance on January 1, 2021 calculated above is b. $206,466. Therefore, the correct option is b. $206,466.