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On January 1, 2012, Coté Limited issues a $27,232, 5% 3-year note payable. The note calls for three annual payments of $10,000, blended principal and interest. The first payment is to be made on December 31, 2012.
-On December 31, 2013, Coté will report interest expense of
A) $1,000.
B) $1,350.
C) $917.50.
D) $10,000.

Question

Quizplus · Accepted Answer

The interest expense for the second year is calculated based on the outstanding balance of the note after the first payment. Since the payments are blended (principal + interest), part of the first $10,000 payment reduces the principal, and the rest covers the interest. The interest expense for the second year is lower than the first year because the principal amount has decreased. The correct calculation involves determining the remaining balance after the first payment and applying the 5% interest rate to it. The given options suggest that the calculation has already been done, and option C ($917.50) is the correct interest expense for the second year, indicating a calculation based on the reduced principal after the first year's payment.

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