Question

Magenta Company purchased a machine from Pink Corporation on October 31, 2016. In payment for the $288,000 purchase, Magenta issued a one-year installment note to be paid in equal monthly payments of $25,588 at the end of each month. The payments include interest at the rate of 12%. The amount of interest expense that Magenta will report in its income statement for the year ended December 31, 2016, is:a. $2,559.b. $2,880.c. $5,533.d. $5,760.

Answer 1

Answer:

Option (c) is correct.

Explanation:

Interest expense on Nov 30, 2016:

= (Purchase amount × Rate of interest) ÷ No. of months in a year

= ($288,000 × 12%) ÷ 12

= $2,880

Principal repayment on Nov 30, 2016:

= Monthly payment - Interest expense on Nov 30, 2016

= $25,588 - $2,880

= $22,708

Interest expense on Dec 31,2016:

= (Purchase amount - Principal repayment) × Rate of interest] ÷ No. of months in a year

= ($288,000 - $22,708) × 12%] ÷ 12

= $2,653

Therefore,

Interest expense for the year ended December 31, 2016:

= Interest expense on Nov 30, 2016 + Interest expense on Dec 31,2016

= $2,880 + $2,653

= $5,533