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Brazos Company issued a 3-year, 6%, note payable for $75,000 on January 1, 2013. The note...

Question:

Brazos Company issued a 3-year, 6%, note payable for $75,000 on January 1, 2013. The note requires that Brazos make equal payments to principal on December 31 each year, plus principal on the unpaid balance. What amount of interest expense will Brazos Company report for 2014?

a. $4,500

b. $3,000

c. $13,500

d. $0

e. none of the above

Interest Expense:

A note payable is a promissory note in writing to pay the amount borrowed along with interest on a specified date in the future. Interest expense is a cost paid by the company to use the amount borrowed for a specified time period and if the loan or the note requires fixed principal repayments each year, then the interest expense decreases each period because a portion of principal amount is repaid each year.

Answer and Explanation:


Correct answer: Option b) $3,000.

Explanation:

As per the data:

  • Note period = 3 years
  • Interest rate = 6% per annum
  • Each year $25,000 ($75,000 / 3) is repaid for principal along with interest on unpaid balance.

Computation:

In the year 2014,

The principal balance will be $50,000 as $25,000 should have been paid on December 31, 2013.

Hence, interest expense will be calculated on the unpaid balance of $50,000.

  • Interest expense = Unpaid balance * Interest rate
  • Interest expense = $50,000 * 6%
  • Interest expense = $3,000

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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