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5 September, 08:27

Magenta Company purchased a machine from Pink Corporation on October 31, 2016. In payment for the $288,000 purchase, Magenta issued a one-year installment note to be paid in equal monthly payments of $25,588 at the end of each month. The payments include interest at the rate of 12%. The amount of interest expense that Magenta will report in its income statement for the year ended December 31, 2016, is:a. $2,559. b. $2,880. c. $5,533. d. $5,760.

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  1. 5 September, 08:46
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    Option (c) is correct.

    Explanation:

    Interest expense on Nov 30, 2016:

    = (Purchase amount * Rate of interest) : No. of months in a year

    = ($288,000 * 12%) : 12

    = $2,880

    Principal repayment on Nov 30, 2016:

    = Monthly payment - Interest expense on Nov 30, 2016

    = $25,588 - $2,880

    = $22,708

    Interest expense on Dec 31,2016:

    = (Purchase amount - Principal repayment) * Rate of interest] : No. of months in a year

    = ($288,000 - $22,708) * 12%] : 12

    = $2,653

    Therefore,

    Interest expense for the year ended December 31, 2016:

    = Interest expense on Nov 30, 2016 + Interest expense on Dec 31,2016

    = $2,880 + $2,653

    = $5,533
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