Santana Industries purchased a supply of electronic components from ABC Corporation on October 1, 2020. In payment for the $5 million purchase, Santana issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. What is the amount of interest expense that Santana will report in its income statement for the year ended December 31, 2020?

Question

Business

Tomas Warren

30 December, 23:47

Santana Industries purchased a supply of electronic components from ABC Corporation on October 1, 2020. In payment for the $5 million purchase, Santana issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. What is the amount of interest expense that Santana will report in its income statement for the year ended December 31, 2020?

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Draven Calhoun · Answer 1

Answer: they will report an interest expense of $150000 in December 2020

Explanation:

firstly we calculate how much interest will be accumulated for the whole year so we are given a $5 million Dollar purchase which is the amount that will accumulate interest over time, then we have been told the company ha issued a 1 year installment note therefore we have a time frame.

so now we will calculate the yearly interest of $5 million:

$5 000000x12% = $600000 so the company will accumulate this interest yearly then we divide this amount by 12 to get the monthly interest.

$600000/12 = $ 50000 per month interest thereafter we will multiply the monthly interest of $50000 by 3 months which is months from October to December.

therefore the interest expense to be reported on the December 2020 income statement is $50000 x 3 = $150000