Question

Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The note will be paid in three annual installments of $200,000, each payable at the end of the year. What is the amount of interest expense that should be recognized by Andrews Inc. in the second year

Answer 1

Answer:

$34,670.

Explanation:

An Amortization schedule will be prepared to determine the interest expense of second year.

Year    Opening           Installment          Interest        Reduction       Closing

           Balance                                        Expense      in Principal      Balance

1         $497,000          $200,000           $49,700       $150,300       $346,700

2          346,700            200,000              34,670         165,330          181,370

Installment comprises of two components: Interest Expenses and Repayment of a Portion of Principal. The interest expense is charged on the closing balance, where as Repayment of Principal is calculated as the difference of Installment and Interest Expense.