Wolford Company borrowed $1,000,000 from U.S. Bank on January 1, 2013 in order to expand its mining capabilities. The five-year note required annual payments of $260,436 and carried an annual interest rate of 9.5%. What is the amount of expense Wolford must recognize on its 2014 income statement?
A) $95,000
B) $79,284
C) $70,259
D) $62,073

Question

Quizplus · Accepted Answer

The correct answer is B: $79,284.The amount of expense Wolford must recognize on its 2014 income statement is the interest expense for the year, which is calculated as the principal amount multiplied by the annual interest rate. In this case, the principal amount is $1,000,000 and the annual interest rate is 9.5%, so the interest expense for the year is $1,000,000 x 9.5% = $95,000. However, since the note requires annual payments of $260,436, which includes both interest and principal, the amount of interest expense that Wolford must recognize on its 2014 income statement is actually $260,436 - $20,716 = $79,284.

Wolford Company Borrowed $1,000,000 from U