Wolford Company borrowed $2,000,000 from U.S.Bank on January 1, 2019, 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 2020 income statement?

Question

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The correct answer is B: $158,567.The amount of expense Wolford must recognize on its 2020 income statement is the interest expense for the year, which is calculated as the face amount of the note multiplied by the annual interest rate. In this case, the face amount of the note is $2,000,000 and the annual interest rate is 9.5%, so the interest expense for the year is $2,000,000 * 9.5% = $190,000. However, since the note was issued on January 1, 2019, only 11 months of interest expense will be recognized in 2020. Therefore, the amount of expense Wolford must recognize on its 2020 income statement is $190,000 * 11/12 = $158,567.

Wolford Company Borrowed $2,000,000 from U