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Allstar Company signed a $200,000 mortgage on July 1, 2018 for the purchase of their new garage...

Question:

Allstar Company signed a {eq}\$200,000 {/eq} mortgage on July 1, 2018 for the purchase of their new garage building. The mortgage entailed equal monthly payments of {eq}\$2,900 {/eq} at the end of each month. The interest rate is {eq}6.0 \% {/eq} per year. How much interest expense will be paid on August 31, 2018? (Round your answer to the nearest whole dollar)

Interest expenses:

Interest expenses refers to those expenses which are incurred against the money borrowed. It is specific percent of principal amount which is paid to the lender in periodic intervals. It is considered as non-operating expense.

Answer and Explanation:

  • Interest expenses for 31 August 2018: $990.5

Date Payment Interest expense Principal repaid Principal outstanding
1 July 2018 $200,000
31 July 2018 $2,900 $1,000 $1,900 $198,100
31 August 2018 $2,900 $990.5 $1909.5 196,190.5
  • Calculation of interest expense:
  • For 31 July 2018:

{eq}\begin{align*} \rm\text{Interest expense}&=\rm\text {Principal} \times \rm\text {Rate} \times \dfrac{\rm\text {Number of month}}{12}\\ &= \$ 200,000 \times 6\% \times \dfrac{1}{12}\\ &= \$ 1,000 \end{align*} {/eq}

  • For 31 August 2018:

{eq}\begin{align*} \rm\text{Interest expense}&= \rm\text{Principal} \times\rm\text{Rate} \times \dfrac{\rm\text{Number of month}}{12}\\ &= \$ 198,100 \times 6\% \times \dfrac{1}{12}\\ &= \$ 990.5 \end{align*} {/eq}


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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