Question

Jesse company adjusts its accounts monthly and closes its accounts on december 31. on october 31, 2015, jesse company signed a note payable and borrowed $150,000 from a bank for a period of six months at an annual interest rate of 6 percent.
a. how much is the total interest expense over the life of the note? how much is the monthly interest expense? (assume equal amounts of interest expense each month.)

Answer 1

Answer: Total Interest Expense is $4500 and Monthly Interest Expense is $750

Explanation: A Note Payable is borrowed for a period of 6 months @ 6% annual interest rate. Since the note payable is borrowed for 6 months only, the interest amount will be the annual interest amount divided by 2.

Annual Interest Amount = Principal × 6%

Annual Interest Amount = $150,000 × 6%

Annual Interest Amount = $9,000

But since the notes payable is taken as a loan for a period of six months,

Total Interest Payable = Annual Interest Amount ÷ 2

Total Interest Payable = $9,000 ÷ 2

Total Interest Payable = $4,500

Monthly interest expense, as it says monthly interest expense assumes equal amount each month and there are 6 months for which loan is taken. So the formula will be:

Monthly Interest Expense = Interest Payable ÷ 6

Monthly Interest Expense = $4500 ÷ 6

Monthly Interest Expense = $750

Therefore, Monthly Interest Expense is $750.