On January 1, Year 1, Echols Company borrowed $100,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $25,045.65. What is the amount of principal repayment included in the payment made on December 31, Year 1?

Question

Quizplus · Accepted Answer

The annual payment of $25,045.65 consists of two components: principal repayment and interest expense. In the first year, the interest expense can be calculated as the beginning balance of the loan ($100,000) multiplied by the interest rate (8%), which equals $8,000. Therefore, the remaining amount of the annual payment ($25,045.65 - $8,000 = $17,045.65) must be the principal repayment included in the payment made on December 31, Year 1.

On January 1, Year 1, Echols Company Borrowed $100,000 Cash