Question

New-Tech Corporation borrowed $20,000 from the bank on March 1, 2011. The note carried a 9% annual interest rate and a 1-year term to maturity. The company paid the principal and the interest in cash on the maturity date. What amount of interest expense will New-Tech Corporation show on its 2011 and 2012 income statements? 2011 2012 a $ -O- $1,800 b. $1,800 $ -O- $1,500 $ 300 d. $1,350 $ 450

Answer 1

The correct answer is:

$ -O- $1,800 (a)

Step-by-step explanation:

Principal = Amount borrowed = $20,000

interest rate = 9% = 0.09

Time = 1 year

Simple Interest = Principal × Rate × Time

Simple Interest = 20,000 × 0.09 × 1 = $1,800.

Next, we are asked to show how interest expense will appear in 2011 and 2012 income statements respectively. First note that the 2011 interest expense will be recorded as $0 because that was the year in which the money was borrowed, and it was not paid back until 2012. In 2012, the interest and principal was paid back, and from the calculation, the interest paid was $1,800.