Question

On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of interest expense will be included in the first annual payment

Answer 1

Answer:

Interest expense = $20,000

Explanation:

Loan Amortization: A loan repayment method structured such that a series of equal periodic installments will be paid for certain number of periods to offset both the loan principal amount and the accrued interest.  

The annual installment is computed as follows:  

Annual installment= Loan amount/annuity factor  

Annual installment is already given as = 37,258 (already given)

Interest payment = interest rate × Loan balance at the beginning of the year

DATA

Interest rate = 8%

Loan balance at the beginning of the year = $250,000

Interest expense = 8%× 250,000 = $20000

Principal paid = Annual installment - Interest = 37,258-20,000 = 17,258 (this  is not required but to explain the concept)

Interest expense = $20,000