On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a...

Question:

On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of the annuity factor would be $81,150.

The amount of principal repayment included in the December 31, Year 1 payment is:

1. $25,920

2. $81,150

3. $74,658

4. $55,230

Notes Payable:

Notes payable are long-term debt instruments issued by companies in exchange for capital. Notes have principal values which must be repaid and interest rates which determine the interest to be paid on the principal. Principal repayment may occur on maturity or over time through annual payments.

Answer and Explanation:

First, we'll calculate Year 1's interest.

Principal $324,000
Interest Rate x 8%
Interest Payment $25,920

We find that $25,920 of the first annual payment would be paid towards interest. The remaining amount would go towards paying off the principal balance.

Annual Payment $81,150
Less: Interest Payment (25,920)
Principal Repayment $55,230

The correct answer is 4. $55,230


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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

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