Question

Currie Company borrowed $17,000 from the Sierra Bank by issuing a 11% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $4,721. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

1072

1870

1556

4721

Answer 1

Amount of interest expense associated with the first payment = $17,000 × 11% = $1,870.

Annual payment = $4,721

Principal repayment in first year = Annual payment - interest expense for first year

= $4,721 - $1,870

=$2,851

Amount of interest expense associated with the second payment = Princiapl bal. in 2nd year beginning × 11%

= Princiapl bal. in 1st year beginning- Repayment of principal in 1st year)  × 11%

=($17,000-$2,851) × 11%

=$14,149 × 11%

=$1,556

Hence, the amount of interest expense associated with the second payment is $1,556.