Wolford Company borrowed $2,000,000 from U.S. Bank on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $520,872 and carried an annual interest rate of 9.5%. What is the amount of expense Wolford must recognize on its 2017 income statement?

Question

Quizplus · Accepted Answer

First, we need to calculate the interest expense for the year 2017:

Interest expense = Beginning balance of the loan x Annual interest rate
= $2,000,000 x 9.5%
= $190,000

Then, we need to calculate the amount of the annual payment that goes towards reducing the principal:

Principal payment = Annual payment - Interest expense
= $520,872 - $190,000
= $330,872

Finally, we can calculate the remaining balance of the loan after the first payment:

Remaining balance = Beginning balance - Principal payment
= $2,000,000 - $330,872
= $1,669,128

Therefore, the amount of expense Wolford must recognize on its 2017 income statement is the interest expense of $190,000.

Wolford Company Borrowed $2,000,000 from U