Home › ACCA › Financial Accounting › Non-Current Liabilities › A company borrows $50,000 for five years at 5% w…
A company borrows $50,000 for five years at 5% with equal annual installments of $11,549. What is the interest portion of the first annual payment?
A$9,049
B$11,549
C$2,500
D$2,048
Answer & Solution
Correct answer: C. $2,500
1. Interest in an installment is the outstanding principal times the rate.
2. At the start of year 1 the full $50,000 is outstanding.
3. Interest: \$50{,}000 \times 5\% = \$2{,}500.
4. The remaining \$11{,}549 - \$2{,}500 = \$9{,}049 (option A) reduces principal, not interest.
5. Option D ($2,048) is year 2's interest on the reduced balance.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.3 "Long-Term Note Payable", p.218_