Farris Company borrowed $800,000 from BankTwo on January 1, 2014 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the amount of expense Farris must recognize on its 2015 income statement?

Question

Quizplus · Accepted Answer

The interest expense for 2015 can be calculated using the following formula: 
Interest Expense = Beginning Balance x Interest Rate 
Since this is the second year of the loan, the beginning balance would be the original loan amount minus the first annual payment: 
Beginning Balance = $800,000 - $208,349 = $591,651 
Thus, the interest expense for 2015 would be: 
Interest Expense = $591,651 x 8.5% = $50,290 
Therefore, the answer is B.

Farris Company Borrowed $800,000 from BankTwo on January 1, 2014