Question

Algoma Co. borrows $250,000 cash on November 1, 2013, by signing a 120-day, 9% note with a face value of $250,000. 2. & 3. What is the amount of interest expense in 2013 and 2014 from this note? (Use 360 days a year. Do not round intermediate calculations.)

Answer 1

The amount of interest expense in 2013 and 2014 are $3,750 and $3,625 respectively.

Step-by-step explanation:

Interest expense would be in

2013;

= Principal × rate of interest × number of days ÷ ( total number of days in a year)

= $250,000 × 9% × (60 ÷ 360)

= $3,750

( 29 days in November + 31 days in December

In 2014,

= Principal × interest rates × number of days ÷ ( number of days in a year)

= $250,000 × 9% × ( 58 ÷ 360)

= $3,625

(30 days in January + 28 days in February)