If a company borrows money from a bank as an installment note, the interest portion of each annual payment will
A) equal the interest rate on the note times the carrying amount of the note at the beginning of the period
B) remain constant over the term of the note
C) equal the interest rate on the note times the face amount
D) increase over the term of the note

Question

Quizplus · Accepted Answer

The interest portion of each annual payment will equal the interest rate on the note times the carrying amount of the note at the beginning of the period. As each payment is made, the carrying amount of the note decreases, which in turn decreases the interest portion of subsequent payments. Therefore, the interest portion will not remain constant and will decrease over the term of the note. The interest portion is calculated based on the carrying amount, not the face amount, of the note at the beginning of the period.

If a Company Borrows Money from a Bank as an Installment