How Does the Amortization of the Principal Balance on an Installment

question 43

Multiple Choice

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

• A)Has no effect on interest expense each year
• B)Increase the amount of interest expense each year
• C)Reduces the amount of interest expense each year
• D)Either A or C, depending on market conditions

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Definitions:

Normal Profit

The level of profit necessary for a company to remain competitive in the market, essentially breaking even when accounting for both explicit and implicit costs.

Implicit Costs

The opportunity costs of using resources owned by the firm for its own use, rather than selling those resources externally.

Economic Profits

The surplus remaining after deducting all costs, including opportunity costs, from total revenues, indicating the financial performance exceeding the break-even point.

Implicit Costs

The opportunity costs that arise from using resources owned by the firm for its own production instead of earning revenue from these resources elsewhere.