Question

NYJ, Inc. borrowed $800,000 on June 1, 2020, and signed a nine-month note bearing interest at 5%. Principal and interest are payable in full at maturity. In connection with this note, NYJ, Inc. should record interest expense in 2021 in the amount of:

Answer 1

Interest expense of $23333.33 should be recorded in 2021 along with a liability of interest payable of $23333.33

Step-by-step explanation:

The interest expense should be recorded in accordance with the accrual principle of accounting. The accrual or matching principle states that the expenses and revenues should be matched and should be recorded in the period to which they relate to rather then when the cash is paid or received.

Thus, the interest expense relating to 7 months from June 2021 to December 2021 will be recorded as interest expense and interest payable in2021.

Interest expense for 7 months = 800000 * 0.05 * 7/12 = $23333.33