Question

Bittner Company borrows $88,500 on November 1, from Harrington State Bank by signing an $88,500, 12%, 18-month note. How much interest expense should Bittner Company record on December 31 if the company uses a calendar year-end and records adjusting entries only at year-end?

Answer 1

Answer: the correct answer is $1,770

Explanation: Interest is calculated by multiplying the principal times the time period the note is redeemable. It is important to bear in mind that all interest are annual unless it is stated differently. This note renders 12 % annually. At December 31 two months of interests are payable and must be recognized as interest expense. Having said that the calculation is as follows:

December 31 : $88,500 * 12% *(2/12) = $1,770