Question

Jane's Donut Co. borrowed $198,000 on January 1, 2018, and signed a two-year note bearing interest at 14%. Interest is payable in full at maturity on January 1, 2020. In connection with this note, Jane's should report interest expense at December 31, 2018, in the amount of:

Answer 1

$27,720

Step-by-step explanation:

The computation of the interest expense

= Principal amount × rate of interest × number of months ÷ (total number of months in a year)

= $198,000 × 14% × (12 months ÷ 12 months)

= $27,720

Basically we applied the simple interest formula to determine the interest expense and the borrowed amount is taken on January 1, 2018 and the interest expense should be reported on December 31, 2018 that comprises of 12 months