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Allstar Company signed a $150,000 mortgage on July 1, 2018, for the purchase of their new garage...

Question:

Allstar Company signed a $150,000 mortgage on July 1, 2018, for the purchase of their new garage building. The mortgage entailed equal monthly payments of $2,700 at the end of each month. The interest rate is 8.0% per year. How much interest expense will be paid on August 31, 2018?

Interest Expenses:

The interest expenses are the cost of borrowing funds. The nature of such costs is non-operating hence, these are shown in the income statement of the firm.

Answer and Explanation:

Calculate interest expense on August 31, 2018

Month Cash payment Interest expense Principal balance Carrying value
July 1,2018 $150,000
July 31,2018 $2,700 $150,000 * 8% * 1/12 = $1,000 $1,700 $148,300
Aug 31,2018 $2,700 $148,300 * 8% * 1/12 = $988.67 $1,711.33 $146,588.67

The interest expense on August 31, 2018 = $988.67


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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