Question

On September 1, 2017, Lowe Co. issued a note payable to National Bank in the amount of $1,500,000, bearing interest at 9%, and payable in three equal annual principal payments of $500,000. On this date, the bank's prime rate was 8%. The first payment for interest and principal was made on September 1, 2018. At December 31, 2018, Lowe should record accrued interest payable of?

Answer 1

Lowe Co. should record accrued interest payable of $30,000 for the 4-month period from September 1, 2018, to December 31, 2018, on the remaining note payable balance after the first principal payment.

Step-by-step explanation:

On December 31, 2018, Lowe Co. should record accrued interest payable on the note payable issued to National Bank. Since the first payment for interest and principal was made on September 1, 2018, we need to calculate the accrued interest from that date to December 31, 2018, a period of 4 months. The annual interest rate on the note is 9%, so the monthly rate is 0.75% (9% divided by 12 months). The interest for one month on the remaining balance after the first payment is $1,000,000 x 0.75% = $7,500. Therefore, the accrued interest for 4 months is $7,500 x 4 = $30,000.