Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1,2019.Alden financed $37,908,000,and the note agreement will require $10 million in annual payments starting on December 31,2019 and continuing for a total of four more years (final payment December 31,2023).Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually.
-What is the amount of the 2020 interest expense?
A)$3,169,880.
B)$3,290,800.
C)$4,000,000.
D)$2,790,800.

Question

Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1,2019.Alden financed $37,908,000,and the note agreement will require $10 million in annual payments starting on December 31,2019 and continuing for a total of four more years (final payment December 31,2023).Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. 
-What is the amount of the 2020 interest expense?
A)$3,169,880.
B)$3,290,800.
C)$4,000,000.
D)$2,790,800.

Quizplus · Accepted Answer

The interest expense for 2020 is calculated on the outstanding balance at the end of 2019. The initial loan amount is $37,908,000. After the first payment of $10,000,000 on December 31, 2019, the outstanding balance is $37,908,000 - $10,000,000 = $27,908,000. The interest expense for 2020 is 10% of this balance, which is $27,908,000 * 0.10 = $2,790,800.

Alden Trucking Company Is Replacing Part of Its Fleet of Trucks