A corporation borrowed money from a bank to build a Plant. The corporation is to
ID: 2452334 • Letter: A
Question
A corporation borrowed money from a bank to build a Plant. The corporation is to pay the bank $100,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation if the corporation is using the effective rate of interest method?
The balance of mortgage payable will remain a constant amount over the 10-year period.
The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
The amount of interest expense will remain constant over the 10-year period.
The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
The balance of mortgage payable will remain a constant amount over the 10-year period.
The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
The amount of interest expense will remain constant over the 10-year period.
The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
Explanation / Answer
Correct option is "B" - The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
This is so because as you pay your intallment ,your outstanding loan will fall and so as your interest on outstanding loan .Since your annual payment is fixed = $100,000 ,you will subtact lower interest to get principal amount which tend to be higher.
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