Question

James Company borrowed $40,000 on a one-year notes payable at 8%. Interest and principal are to be repaid at the end of the note term. If the note was issued on October 1 of Year 1, the amount of accrued interest on the December 31, Year 1 financial statements is ______.

Answer 1

For a $40,000 one-year note at an 8% annual interest rate, the accrued interest over three months is $800. This amount would be reported on the December 31, Year 1 financial statements.

Step-by-step explanation:

If James Company borrowed $40,000 on a one-year note payable at an 8% interest rate, the accrued interest on the December 31, Year 1 financial statements would be the interest that has accumulated since the issuance of the note on October 1 of Year 1. Since the note term is for three months (October, November, and December of Year 1), the interest can be calculated by the formula:

Interest = Principal × Interest Rate × Time Period

Therefore, for a $40,000 note at an 8% annual interest rate, the calculation for three months of interest would be:

Interest = $40,000 × 0.08 × (3/12)

Interest = $40,000 × 0.08 × 0.25

Interest = $800

So the amount of accrued interest on the December 31, Year 1 financial statements would be $800.