Question

On January 1, 2021, Jones Company signed a $10,000 note payable due in 4 annual installments of $2,500 plus 5% interest. Interest expense for the second year of the note will be:

a) 188

b)250

c)500

d)375

Answer 1

Answer is $375:

Face Value = $10,000
Rate of Interest = 5%

First Year:

Beginning Value of Note = $10,000
Principal Repaid = $2,500

Interest Expense = 5% * Beginning Value of Note
Interest Expense = 5% * $10,000
Interest Expense = $500

Ending Value of Note = Beginning Value of Note - Principal Repaid
Ending Value of Note = $10,000 - $2,500
Ending Value of Note = $7,500

Second Year:

Beginning Value of Note = $7,500
Principal Repaid = $2,500

Interest Expense = 5% * Beginning Value of Note
Interest Expense = 5% * $7,500
Interest Expense = $375

Ending Value of Note = Beginning Value of Note - Principal Repaid
Ending Value of Note = $7,500 - $2,500
Ending Value of Note = $5,000