Question

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest expense that Clayton would report in Year 1 and Year 2, respectively would be

1) $360, and $0.
2) $0, and $360.
3) $270, and $90.
4) $270, and $0.

Answer 1

Clayton Company will report an interest expense of $270 in Year 1 and $90 in Year 2 for the $6,000 one-year note at a 6% interest rate, which totals to $360 for the full year.

Step-by-step explanation:

The question is asking about the amount of interest expense that Clayton Company would report in Year 1 and Year 2 after borrowing $6,000 from the State Bank with a 6% interest rate. Since the interest is calculated annually, for a one-year period, we would multiply the principal amount by the interest rate, and then by the time period in years to get the total interest amount. The correct calculation for the interest expense in Year 1 (April 1, Year 1 to December 31, Year 1) is $6,000 × 6% × (9/12), which equals $270. Since the note is for one year, the remaining interest expense of $90 will be reported in Year 2 (January 1, Year 2 to March 31, Year 2). Therefore, the correct answer is 3) $270, and $90.