Question

Proverbial Corp. signed a 6-year note relating to the purchase of a new delivery fleet; annual payments are due at the end of the year. Proverbial's effective interest rate is 8%. At the time of purchase, the company recorded the fleet at $200,000. At the end of the first year, the net book value has decreased to $160,000, while the carrying value of the note is $164,000. Interest expense relating to the second year should be

Answer 1

Answer:

$13,120

Explanation:

The interest expense attributable to the second year is the carrying value of the note at the beginning of second year(at the end of the first year) multiplied by the effective annual rate in order to determine the cost of the loan to the company

interest expense in year 2=$164,000*8%

interest expense in year 2=$13,120

The interest expense would be shown as financial charge in the income statement for the second year