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On January 1, Year 1, The Palms borrowed $200,000 to purchase a warehouse by agreeing to a 8%, 5-year note with the bank. Payments of $50,091.29 are due at the end of each year. The first payment will be made on December 31, Year 1.

-What is the interest expense for Year 1 and Year 2,respectively? (Round your final answers to the nearest dollar. )
A)$3,200 and $14,000
B)$16,000 and $16,350
C)$16,000 and $13,273
D)$20,625 and $16,000

Question

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On January 1, Year 1, The Palms borrowed $200,000 to purchase a warehouse by agreeing to a 8%, 5-year note with the bank. Payments of $50,091.29 are due at the end of each year. The first payment will be made on December 31, Year 1.

-What is the interest expense for Year 1 and Year 2,respectively? (Round your final answers to the nearest dollar. )
A)$3,200 and $14,000
B)$16,000 and $16,350
C)$16,000 and $13,273
D)$20,625 and $16,000

Quizplus · Accepted Answer

Year 1 Interest expense = Principal balance on January 1 of $200,000 × 8% = $16,000
Year 1 Principal repayment = Payment of $50,091.29 - Interest expense of $16,000 = $34,091.29
Principal balance at end of Year 1 = Principal balance on January 1 of $200,000 - Principal repayment of $34,091.29 = $165,908.71
Year 2 Interest expense = Principal balance on January 1 of $165,908.71 × 8% = $13,272.6968 (rounded to $13,273)

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