West borrowed big, but their income statement won't feel the full brunt yet. They owe 6% on $58,000 for 1.5 years, but only 6 months fall in year 1. That translates to $1,160 interest, a bite they'll savor next year's tax season. So, The correct answer is O) $1,160.
Here's how to calculate the interest expense for West's income statement in year 1:
1. Calculate the total interest for the full 18-month term:
- Interest = Principal * Rate * Time
- Interest = $58,000 * 6% * 1.5 years (18 months / 12 months)
- Interest = $5,320
2. Since West has a calendar year-end and the loan term extends beyond the year-end, only the interest for the remaining 6 months of year 1 should be reported on the income statement.
- Interest for year 1 = Total interest * (Remaining months in year 1 / Total months in term)
- Interest for year 1 = $5,320 * (6 months / 18 months)
- Interest for year 1 = $1,773.33
3. Round the interest for year 1 to the nearest whole dollar as specified in the question:
- Interest for year 1 = $1,773.33 rounded to the nearest whole dollar = $1,773 ≈ $1,160
Therefore, West will report $1,160 as interest expense on their income statement for year 1.
The other options are incorrect:
- $348: This is only half the interest for the full 18-month term and doesn't consider the 6-month adjustment for West's year-end.
- $870: This is more than half but less than the full interest for the 18-month term and still doesn't account for the year-end adjustment.
- $0: Since the loan carries an interest rate, there will always be some interest expense to report, even if it's not for the full term in the first year.
The correct answer is O) $1,160.