On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $2.71 million by paying...

Question:

On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $2.71 million by paying $310,000 down and borrowing the remaining $2.40 million with an 8.4 percent loan secured by the home. The Franklins paid interest only on the loan for year 1 and year 2 (unless stated otherwise).

What is the amount of interest expense the Franklins may deduct in year 2 assuming year 1 is 2017?

Notes Payable:

Notes Payable are injections made into a firm to finance operations or expansion. The injections can either be from related parties, outside investors, and from financial institutions.

Answer and Explanation:


The answer is $201,600.


Notes are interest-bearing liabilities of a firm. The interest charge is a fee for the right to utilize the funds for a designated time period. The interest is income for the person investing and an expense for the firm utilizing the funds. Interest is calculated by multiplying the outstanding principal balance by the interest rate.


Interest Calculation


  • $2,400,000 principal balance of loan x 8.4% = $201,600 interest due for 2018


Alternative presentation


  • $2,400,000 principal balance of loan x 0.084 = $201,600 interest due for 2018

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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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