Question

On January? 1, 2018, Allgood Company purchased equipment and signed a? six-year mortgage note for? $186,000 at? 15%. The note will be paid in equal annual installments of? $49,148, beginning January? 1, 2019. Calculate the portion of interest expense paid on the third installment.? (Round your answer to the nearest whole? number.)

A. ?$21,048

B. ?$49,148

C. ?$27,900

D. ?$164,752

Answer 1

THE ANSWER IS A. $ 21,048.

CALCULATIONS ARE SHOWN BELOW:

Installment includes principal and interest.

So $ 49,148 includes principal plus interest paid each year.

FIRST YEAR i.e. FROM JAN 1, 2018 TO JAN 1 , 2019 (FIRST INSTALLMENT)

Interest = $ 186,000 × 15% = $ 27,900

And principal amount paid in this year Jan 1, 2019= Installment amount - Interest = $ 49,148 - $ 27,900 = $21,248.

Principal balance on Jan 1, 2019 = Jan 1, 2018 principal balance - Principal paid on Jan 1, 2019 = $ 186,000- $21,248 = $164,752

SECOND YEAR i.e. JAN 1, 2019 TO JAN 1 , 2020 (SECOND INSTALLMENT)

Second year interest = Principal amount as on Jan 1, 2019 multiplied by 15% = $164,752 ×15% = $24,712.8

Principal paid in second year i.e Jan 1, 2020 = Installment amount - interest = $49,148 - $24,712.8 = $24,435.2

Principal balance as on Jan 1, 2020 = Jan 1, 2019 principal balance - Jan 1 , 2020 principal paid = $ 164,752- $ 24,435.2 = $140,316.8

THIRD YEAR i.e. JAN 1, 2020 TO JAN 1, 2021 (THIRD INSTALLMENT)

Interest on third installment = Principal amount as on Jan 1, 2020 multiplied by 15%

=$ 140,316.8 * 15 %= 21,047.52

Rounding off $ 21,047.52 = $21048