Question

4. On September 30, 2019, World Company borrowed $1,000,000 on a note payable with a 5% stated interest rate. The first quarterly payment of S261,635 including principal and interest was made December 31, 2019. How much interest expense was included in the first payment and how much is total interest over the 1-year life of the note? Interest in first payment Total interest $12.500 $50,000 $12,500 $46,540 $11.635 $50,000 $11.635 S46,540

Answer 1

Calculation of First year interest -

First installment payment = 261635

in which Interest part will be = 1000000*5/100*1/4

= 12500

because the outstanding amount at the end of first quarter when installment paid has $ 1000000 so the interest amount will be calculated on $ 1000000.

Interest rate has given of a year = 5% for quarter interest rate = 5%*1/4 = 1.25%

Total interest over the 1 year life of the note = 1000000*5/100

= $ 50000

as amount outstanding during the year = 1000000 so interest will be calculated on whole/full amount.

so the option (a) should be correct

Please check with your answer and let me know.