Question

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense?

Answer 1

Answer:

It would report 21,778 on interest expense

Explanation:

Because it is the first payment, we can use the compoun interest formula

$Principal * (1+ r)^{time} = Amount$

$Amount - Principal = Interest Paid$

$1,000,000 * (1+ 0.09)^{1/4} =1,021,778$

$1,021,778- 1,000,000= 21,778$

The rest of the cuota would be amortization of the principal

It is important to do not split the interest in four because the interest are decreasing over the course of the note life. That's because along with the interest accrued during the period World Co. is also paying a portion of the principal