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. Rodeo's annual cost of borrowing is 6%.

What is the total amount of interest expense Rodeo will pay over the life of the loan?

$131,140

$137,720 Answer i think

$181,140

$537,720

none of the above

Use the information above regarding Rodeo Warehouse.

Assume instead that ther purchase contact requires Rodeo Warehouse to make a down payment of $50,000, then make 5 annual payments of $80,000 each plus interest, with the first payment due on December 31, 2013. What amount of interest expense will Rodeo report for 2013?

$27,000

$24,000

$19,200

$3,000

none of the above

a.

$131,140

b.

$137,720 Answer i think

c.

$181,140

d.

$537,720

e.

none of the above

Explanation / Answer

1./

2./

COST OF THE EQUIPEMENT = $450000

LESS DOWN PAYMENT = ($50000)

BALANCE AMOUNT DUE AT JAN1 2013 = $400000

INTEREST FOR YEAR 2013 ($400000 * 6%) = $24000

DOWN PAYMENT $50000 HALF YEARLY INSTALMENT ($26886 * 20 PERIODS) $537720 TOAL PAYMENT $587720 COST OF THE EQUIPEMENT $450000 INTEREST PORTION $137720

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