Question

Algo) Computing interest revenue for two periods LO P4 On April 1 of Year 1, Respawn accepted a $24,000, 12-month, 6% note from a customer in granting a time extension on his past-due account receivable. Respawn's year-end is December 31. Compute interest revenue recorded by Respawn in Year 1 and Year 2

Answer 1

Respawn's interest revenue for the $24,000 note at 6% interest is $720 for Year 1 (9 months) and $360 for Year 2 (3 months) prior to note maturity.

Step-by-step explanation:

Respawn will record interest revenue of $720 in Year 1, and $360 in Year 2 for the $24,000 note at a 6% interest rate. To compute the interest revenue for Year 1, we take into account that the note was issued on April 1 and Respawn's year-end is December 31. Since the note is active for 9 months in Year 1, the interest for Year 1 is calculated as follows: $24,000 × 6% × (9/12). This equals $1,080 × (9/12) or $720.

For Year 2, the note has 3 remaining months until maturity, thus the interest revenue is $24,000 × 6% × (3/12). This comes out to $1,080 × (3/12) or $360. This approach aligns with the method demonstrated in the given Box 1.2: Interest Example, where the future values are straightforwardly calculated using the principle amount, interest rate, and time period involved.