Question

Universal Travel Inc. borrowed $500,000 on November 1, 2018, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2018, in the amount of:$8,000.$30,000.$5,000.$25,000.

Answer 1

$5,000

Step-by-step explanation:

The computation of the interest payable is shown below:

= Borrowed amount or Principal × rate of interest × (number of months ÷ total number of months in a year)

= $500,000 × 6% × (2 months ÷ 12 months)

= $5,000

The 2 months is calculated from November 1, 2018, to October 31, 2019

It is somewhat similar to the simple interest formula.