Moor Company sold some machinery to Gale Company on January 1, 2010.The cash selling price would have been $284,310.Gale entered into an instalment sales contract which required annual payments of $75,000, including interest at 10 percent, over five years.The first payment was due on December 31, 2010.The collection of the payments is reasonably assured and measurement is not an issue.What amount of interest income should be included in Moor's 2011 income statement (the second year of the contract)?

Question

Quizplus · Accepted Answer

The total amount of payments to be received over the five years is $75,000 × 5 = $375,000. 
The total interest revenue over the five years is $375,000 − $284,310 = $90,690. 
To calculate the interest revenue for the second year, we need to subtract the interest revenue recognized in the first year. 
The interest revenue recognized in the first year is: 
Beginning principal balance = $284,310
Annual payment = $75,000
Interest rate = 10%
Interest revenue = $28,431 
($284,310 × 10%) 
The remaining principal balance after the first payment is $284,310 − ($75,000 − $28,431) = $237,741. 
The interest revenue for the second year is: 
Beginning principal balance = $237,741
Annual payment = $75,000
Interest rate = 10%
Interest revenue = $23,774 
($237,741 × 10%) 
Therefore, the answer is B.

Moor Company Sold Some Machinery to Gale Company on January