Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a 10-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 interest expense is $4,500.

Question

Quizplus · Accepted Answer

The amount of the payment for Year 1 that is interest expense is calculated as follows: 
Total payment - principal portion of payment = interest expense 
$7,791 - $50,000/10 = $7,791 - $5,000 = $2,791 
Therefore, the statement is false and the correct amount of interest expense for Year 1 is $2,791.

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