Farris Company borrowed $800,000 from BankTwo on January 1, 2020, in order to expand its mining capabilities.The 5-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%.What amount of interest expense will Farris recognize on its 2021 income statement?

Question

Quizplus · Accepted Answer

To calculate the interest expense for 2021, we need to find the interest portion of the annual payment.

Step 1: Find the interest portion of the first payment
For the first payment, the interest portion can be calculated as:

Interest = Beginning balance x Interest rate
         = $800,000 x 8.5%
         = $68,000

Step 2: Find the interest portion of the second payment
For the second payment, the beginning balance is reduced by the principal amount paid in the first payment. So, the beginning balance for the second payment is:

Beginning balance (2021) = Beginning balance (2020) - Principal paid in 2020
                         = $800,000 - $208,349
                         = $591,651

The interest portion of the second payment can be calculated as:

Interest = Beginning balance x Interest rate
         = $591,651 x 8.5%
         = $50,290

Therefore, the interest expense for 2021 is $50,290. The correct answer is B.

Farris Company Borrowed $800,000 from BankTwo on January 1, 2020