Smithsonian Industries purchased a supply of electronic components from Sunshine Corporation on October 31, 2021. In payment for the $1,000,000 million purchase, Smithsonian issued a 1-year installment note to be paid in equal monthly payments of 88,849 at the end of each month. The payments include interest at the rate of 12%. What is the amount of interest expense that Smithsonian will report in its income statement for the year ended December 31, 2021?
Amortization Schedule | ||||
Date | Cash Paid | Interest Expense | Reduction in Principal | Outstanding balance |
Oct. 31, 2021 | 1,000,000 | |||
Nov. 30, 2021 | 88,849 | 1,000,000 x 1% = 10,000 | 88,849-10,000 = 78,849 | 1,000,000-78,849= 921,151 |
Dec. 31, 2021 | 88,849 | 921,151 x 1% = 9,212 | 88,849-9,212 = 79,637 | 921,151-79,637 = 841,524 |
Total | $19,212 |
Interest expense to be reported in the income statement for the year ended December 31, 2021 = $19,212
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Note payable = $1,000,000
Annual interest rate = 12%
Monthly interest rate = 1%
Note Amortization Schedule | ||||
Date | Cash Paid | Interest Expense | Reduction in Principal | Outstanding balance |
Oct. 31 | 1,000,000 | |||
Nov. 30 | 88,849 | 1,000,000 x 1% = 10,000 | 88,849-10,000 = 78,849 | 1,000,000-78,849= 921,151 |
Dec. 31 | 88,849 | 921,151 x 1% = 9,212 | 88,849-9,212 = 79,637 | 921,151-79,637 = 841,524 |
Total | $19,212 |
Interest expense to be reported in the income statement for the year ended December 31, 2021 = $19,212
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The calculation for the interest expense to be recorded is as under
1000000/12= $83333.33
Montly payment= 88849
Interest expense per month= 88849-833333.33=5517.67
From 1st Nov to 31 December = 5517.67*2 = 11031.34, the amount that should be. Reported for the year ended dec 31
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