Question

Phipps Company borrowed $24,000 cash on October 1, Year 1, and signed a nine-­month, 9% interest bearing note payable with interest payable at maturity. The amount of interest expense to be reported during Year 2 is __________?

Answer 1

$1620

Step-by-step explanation:

Assumption: The company follows calendar year for accounting purpose.

Given: Amount borrowed = $24000

Rate of interest = 9% per annum

Interest relating to year 1 ending on Dec 31, = 24000 × 9% ×
`(3\ months)/(12\ months)`

= $540

The journal entry would be:

Interest expense Dr. 540

To interest payable 540

(being interest payable recorded)

In the second year , the interest expense would be the remaining i.e

total interest $24000 × 9% ×
`(9)/(12)` = $1620

Interest Expense Dr. 1620

Interest Payable Dr. 540

Notes Payable Dr. 24,000

To Cash A/C 26,160

(Being notes payable and interest paid recorded)

Hence, the amount of interest expense to be reported in year 2 is $1620