Question

A company borrowed $70,000 on march 1 by issuing an 18-month, 12% note. both the note and the interest will be paid when the note matures. which statement is true at december 31?

O The company has $70,000 of notes payable that is a long-term liability.
O Both the note payable and the interest payable are long-term liabilities.
O The company has $7,000 of interest payable that is a current liability.
O The company has $4,667 of interest payable that is a current liability.
O The company has $8,400 of interest payable that is a current liability.

Answer 1

The correct statement at December 31st is that the company has $7,000 of interest payable, which is a current liability, resulting from a $70,000 loan taken on March 1st with a 12% annual interest rate over 10 months.

Step-by-step explanation:

When a company borrows funds through an issuance of a note, they agree to pay back the principal amount along with interest. In the scenario given, a company took a loan of $70,000 on March 1st with an 18-month term at a 12% annual interest rate. This interest accrues over time and must be accounted for in the company's financial statements.

To determine the interest payable on December 31st, you would calculate the interest for the time period from March 1st to December 31st. This time period encompasses 10 months, and at 12% per annum, the monthly interest rate is 1% (12% ÷ 12). Therefore, the interest for this period would be:

Interest = Principal × Monthly Interest Rate × Number of Months
Interest = $70,000 × 0.01 × 10
Interest = $7,000

Thus, the statement that is true at December 31st is: "The company has $7,000 of interest payable that is a current liability".