On January 1, 2015, Bratios Company purchases equipment and signs a 6-year mortgage note for $80,000 at 15%. The note will be paid in equal annual installments of $21,139, beginning January 1, 2016. Calculate the portion of interest expense paid on the third installment.

Question

Quizplus · Accepted Answer

To calculate the interest expense paid on the third installment, we need to determine the amount of the payment that goes towards interest and the amount that goes towards reducing the principal balance of the loan.

First, we can calculate the total interest expense on the loan by multiplying the original loan balance ($80,000) by the interest rate (15%) and the length of the loan (6 years).

Total interest expense = $80,000 x 0.15 x 6 = $72,000

Next, we can subtract the total interest expense from the total amount paid over the life of the loan (6 x $21,139 = $126,834) to determine the total amount that will go towards reducing the principal balance:

Total principal reduction = $126,834 - $72,000 = $54,834

We can then divide the total principal reduction by the number of payments to determine the portion of each payment that goes towards reducing the principal balance:

Annual principal reduction = $54,834 / 6 = $9,139

Finally, we can subtract the annual principal reduction from the total annual payment to determine the portion of each payment that goes towards interest expense:

Interest expense = $21,139 - $9,139 = $12,000

Therefore, the portion of interest expense paid on the third installment is $12,000.

On January 1, 2015, Bratios Company Purchases Equipment and Signs