Finney Company borrowed $800,000 from BankTwo on January 1, 2009 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 9.5%. What is the amount of expense Finney must recognize on its 2010 income statement?

Question

Quizplus · Accepted Answer

To calculate the amount of expense Finney must recognize on its 2010 income statement, we need to find out how much of the annual payment is attributed to interest and how much is attributed to principal repayment.

The interest payment for the first year can be calculated as follows:

Interest payment = Beginning balance x interest rate 
                          = $800,000 x 0.095 
                          = $76,000

This means that of the $208,349 annual payment, $76,000 is attributed to interest and the remaining $132,349 is attributed to principal repayment.

To find out the amount of expense Finney must recognize on its 2010 income statement, we need to subtract the principal repayment from the total payment for the year:

Expense = Total payment - Principal repayment 
             = $208,349 - $132,349 
             = $76,000

Therefore, the amount of expense Finney must recognize on its 2010 income statement is $76,000.

Option B is the correct answer.

Finney Company Borrowed $800,000 from BankTwo on January 1, 2009