Question

On January 1, Year 1, Barnes Company issued a $100,000 installment note. The note had a 10-year term and an 8 percent interest rate. Barnes agreed to repay the principal and interest in 10 annual payments of $14,903 at the end of each year. The amount of interest expense shown on the Year 2 income statement is (round your answer to two decimal places).

Answer 1

The amount of interest expense shown on the Year 2 income statement is $7,447.76.

Step-by-step explanation:

This can be calculated as follows:

Amount of installment note = $100,000

Interest rate = 8%

Annual payments = $14,903

Year 1 interest expense = Amount of installment note * Interest rate = $100,000 * 8% = $8,000

Principal repaid in Year 1 = Annual payments - Year 1 interest expense = $14,903 - $8,000 = $6,903

Principal outstanding at the beginning of Year 2 = Amount of installment note - Principal repaid in Year 1 = $100,000 - $6,903 = $93,097

Year 2 interest expense = Principal outstanding at the beginning of Year 2 * Interest rate = $93,097 * 8% = $7,447.76

Therefore, the amount of interest expense shown on the Year 2 income statement is $7,447.76.