Question

On September 1, 2017, Halley Co. issued a note payable to Fidelity Bank in the amount of $2,700,000, bearing interest at 10%, and payable in three equal annual principal payments of $900,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2018. At December 31, 2018, Halley should record accrued interest payable of:a. $ 54450. b. $ 80550. c. $181500.d. $ 89500.

Answer 1

accrued interest payable = $60,000

Step-by-step explanation:

Since the first principal payment was done on September 1, 2018, by December 31, 2018, the principal's balance = $2,700,000 - $900,000 = $1,800,000

By December 31, Halley Co. had 4 months of interest payable (September, October, November, and December), so total accrued interest payable was:

principal x interest rate x periods = $1,800,000 x 10% x (4/12) = $60,000

Answer 2

Neither of the options are correct because the correct answer is $60,000

Step-by-step explanation:

The accrued interest payable is dependent upon the contract and in the contract timing of interests, principal payments and interest rates are agreed. So interest rate agreed must be used not the market rate. The interest accrued can be calculated on the principal amount not paid yet.

The first payment has been paid and the principal amount not yet paid is:

Principal amount not yet paid = $27,00,000 - $27,00,000/3 = $18,00,000

The interest accrued at the end of year relates to only 4 months (1 September to 31 December) which can be computed on principal amount not yet paid.

Interest accrued = 10% interest rate * 4/12 months * $18,00,000 principal amount unpaid

Interest accrued = 0.1 * 4/12 * $18,00,000 = $60,000