Currie Company borrowed $26,000 from the Sierra Bank by issuing a 11% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $10,640. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

Question

Quizplus · Accepted Answer

Each year, $10,640 is paid towards the note. Therefore, the interest expense on the note decreases each year.

To calculate the interest expense associated with the second payment, we first need to determine how much of the payment goes towards interest and how much goes towards reducing the principal.

The interest on the note for the first year can be calculated by multiplying the balance of the note by the interest rate:
$26,000 x 0.11 = $2,860

Therefore, the first year's payment of $10,640 included $2,860 of interest expense, which means that $7,780 went towards reducing the principal.

To calculate the balance of the note immediately prior to the second payment, we need to subtract the amount of principal paid off in the first year:
$26,000 - $7,780 = $18,220

Now we can calculate the interest expense associated with the second payment by multiplying the balance of the note by the interest rate:
$18,220 x 0.11 = $2,004

Therefore, the amount of interest expense associated with the second payment is $2,004.

Currie Company Borrowed $26,000 from the Sierra Bank by Issuing