Question

On October 31, a company finances the purchase of equipment with a $500,000 5-year note payable. The note has an interest rate of 12% and a monthly payment of $11,122, due at the end of each month. After two payments have been made, what amount should the company report as the note payable balance in its December 31 balance sheet?

a. $490,061
b. $487,695
c. $477,756
d. $487,756

Answer 1

Answer: b. $487,695

Step-by-step explanation:

When the $11,122 monthly payment is made, it comprises of 2 things. The interest payment and the principal repayment.

For the first payment, the interest is;

= 500,000 * 12% * 1/12 ( monthly adjustment)

= $5,000

The remaining amount will be the principal repayment;

= 11,122 - 5,000

= $6,122

The note payable will reduce to;

= 500,000 - 6,122

= $493,878‬

Second payment;

Interest = 493,878‬ * 12% * 1/12

= $4,938.78

Principal Repayment = 11,122 - 4,938.78‬

= ‬$6,183.22‬

The note payable will become;

= 493,878‬ - 6,183.22‬

= 487,694.78‬

= $487,695