Question

Riley Company borrowed $32,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 8% annual interest rate. Riley earned cash revenue of $980 in Year 1 and $1,300 in Year 2. Assume no other transactions. The amount of net income on the Year 2 income statement would be:

A. $640
B. $660
C. $(20)
D. $1.940

Answer 1

B. $660

Step-by-step explanation:

Net income is the difference between the sales for the year and the total expense incurred. The expense in this question is the interest on the loan for year 2.

Since the loan was taken on 1 April of year 1 for a year, the interest expense to be recognized for year 2 will be for only 3 months. This expense may be computed as

=3/12 * $32,000 * 8%

= $640

Net income = $1,300 - $640

= $660