Harris Company borrowed $800000 from Liber Bank on January 1 2016 in order to expand its mining capabilities. The five-year note required annual payments of $208349 and carried an annual interest rate of 8.5%. What is the amount of expense Harris must recognize on its 2017 income statement?

Question

Quizplus · Accepted Answer

The expense recognized on the income statement for 2017 includes interest expense. The interest expense is calculated on the outstanding balance of the loan at the beginning of the year. After the first payment of $208,349 in 2016, part of this payment goes towards interest and the rest reduces the principal. The initial interest for the first year (2016) is 8.5% of $800,000, which is $68,000, leaving $140,349 ($208,349 - $68,000) to reduce the principal. Thus, the principal at the beginning of 2017 is $800,000 - $140,349 = $659,651. The interest expense for 2017 is 8.5% of $659,651, which equals approximately $56,070.

Harris Company Borrowed $800000 from Liber Bank on January 1