On January 1, 2013, Rodeo Warehouse purchased new equipment for its distribution

Question

On January 1, 2013, Rodeo Warehouse purchased new equipment for its distribution center. The equipment cost $450,000; Rodeo paid $50,000 as a down payment and is required to pay $26,886 each six months for the next 10 years, with the first payment due on June 30, 2013. Rodeo's annual cost of borrowing is 6%.

How much interest expense will Rodeo record for the first six months, and what is the outstanding loan balance as of June 30, 2013?

$2,886 expense; $397,114 loan balance

$24,000 expense; $397,114 loan balance

$13,500 expense; $436,614 loan balance

$12,000 expense; $385,114 loan balance

none of the above

$2,886 expense; $397,114 loan balance

$24,000 expense; $397,114 loan balance

$13,500 expense; $436,614 loan balance

$12,000 expense; $385,114 loan balance

none of the above

Explanation / Answer

Interest For the first 6 months = (450000-50000)*6%*6/12 i.e 12000

Loan Balance = (450000-50000) - ( 26886-12000) i.e 385114

Answer is D 12000 expense and 385114 loan balance

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