Question

Sheridan Company borrowed $4540000 from U.S. Bank on January 1, 2019 in order to expand its mining capabilities. The 5-year note required annual payments of $1182381 and carried an annual interest rate of 9.5%. What is the amount of expense Sheridan must recognize on its 2020 income statement?

$331787

$306249

$359947

$431300 243

Answer 1

Amount borrowed = $4,540,000

Interest rate = 9.5%

Interest expense for year 2019 = Amount borrowed x Interest rate

= 4,540,000 x 9.5%

= $431,300

Annual installment = $1,182,381

Repayment of principal in first installment = Annual installment - Interest expense for year 2019

= 1,182,381 - 431,300

= $751,081

Loan amount outstanding at the beginning of year 2020 = Amount borrowed - Repayment of principal in first installment

= 4,540,000 - 751,081

= $3,788,919

Interest expense for year 2020 = Loan amount outstanding at the beginning of year 2020 x Interest rate

= 3,788,919 x 9.5%

= $359,947

Third option is correct.