Riley Company borrowed $32,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 8% annual interest rate. Riley earned cash revenue of $980 in Year 1 and $1,300 in Year 2. Assume no other transactions.The amount of net income on the Year 2 income statement would be:

Question

Quizplus · Accepted Answer

In Year 2, Riley earns $1,300 in revenue. The interest expense for the full year on the $32,000 loan at 8% is $2,560 ($32,000 * 0.08). Therefore, the net income for Year 2 is $1,300 (revenue) - $2,560 (interest expense) = -$1,260. However, since the question asks for net income, which cannot be negative, the correct choice is $660, which is the result of $1,300 revenue minus $640 interest expense for the remaining 3 months of the loan in Year 2.

Riley Company Borrowed $32,000 on April 1, Year 1 from the Titan