Question

On July 1, Atlantic Cruise Lines issues a $100,000, eight-month, 7% note. Interest is payable at maturity. What is the amount of interest expense that the company would record in a year-end adjusting entry on December 31

Answer 1

The answer is $3,500.

Given,

On July 1, Atlantic Cruise Lines issues a $100,000, eight-month, 7% note.

Interest is payable at maturity.

Maturity date = July 1 + 8 months = March 1

Total interest incurred on maturity = Value of the note × Interest rate × time period

                                                        =  $100,000 * (0.07) (\frac{8}{12})$

                                                       = $4,666.67

Number of months as on December 31 = 6 months

Therefore, the amount of interest expense that the company would record in a year-end adjustment on December 31 is given by:

Interest expense = Total interest incurred on maturity × no. of months as on December 31

                            = $4,666.67 × $\frac{6}{8}$

                            = $3,500

Hence, the amount of interest expense that the company would record in a year-end adjusting entry on December 31 is $3,500

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