Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-year period and has an annual interest rate of 9%. At the end of each year, Davis will make a payment of $7,791, which includes both principal and interest. The amount of the payment for Year 1 that is reduction of principal is $3,587.

Question

Quizplus · Accepted Answer

The amount of the payment for Year 1 that is reduction of principal can be calculated as follows:

Payment amount - (Beginning balance x Interest rate) = Principal reduction
$7,791 - ($50,000 x 0.09) = $2,791

Therefore, the correct answer is B, and the statement in the question is false.

Davis Corporation Borrowed $50,000 on January 1, Year 1