Question

Craig borrowed $700,000 on October 1, 2020 and is required to pay $720,000 on March 1, 2021. What amount is the note payable recorded at on October 1, 2020 and how much interest is recognized from October 1 to December 31, 2020?

a. $700,000 and $0.

b. $700,000 and $12,000.

c. $720,000 and $0.

d. $700,000 and $20,000.

Answer 1

b. $700,000 and $12,000.

Step-by-step explanation:

The computation is shown below

For note payable recorded as on October 1 is equal to the borrowed amount i.e $700,000

And, the interest recognized from October 1 to December 31, 2020 is

= (Paying amount - borrowed amount) × number of months ÷ Given months

= ($720,000 - $700,000) × 3 months ÷ 5 months

= $20,000 × 3 months ÷ 5 months

= $12,000

The 3 months is calculated from Oct 1 to Dec 31

And, the 5 months is calculated from Oct 1 to Mar 1

hence, the correct option is B.