Davis Corporation borrowed $50,000 on January 1, Year 1. The loan is for a ten-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 total payment of $7,791 includes both principal and interest. The interest expense for Year 1 is given as $4,500, which is calculated as follows:

Total payment for Year 1 = $7,791 
Principal payment for Year 1 = Total payment - Interest expense 
Principal payment for Year 1 = $7,791 - $4,500 = $3,291

Therefore, the amount of the payment for Year 1 that is interest expense is $4,500.

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