Question

On June 1, Year 1, Yola Corp. lent Dale $500,000 on a 12% note, payable in five annual installments of $100,000 beginning January 2, Year 2. In connection with this loan, Dale was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Dale after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, Year 1. Dale made timely payments through November 1, Year 1. On January 2, Year 2, Yola received payment of the first principal installment plus all interest due. At December 31, Year 1, Yola’s interest receivable on the loan to Dale is ________.

Answer 1

Answer:

C) $10,000

Explanation:

The last interest payment was made on November 1, so by December 31, two months worth of interest is considered receivable.

Interest receivable = principal x interest rate x time periods = $500,000 x 12% x (2/12) = $10,000

By December 31, no principal payments had been done yet.

Answer 2

Answer:

Options Include:

A. $0

B. $5,000

C. $10,000  is Correct

D. $15,000

Explanation:

Since the last interest payments were paid on November 1, the November and December interest is not paid as of December 31, 2005.

As of December 31, 2005, a gross receivable of $10,000= (2/12)(12 per cent)($500,000) is therefore receivable for two months of interest.

As of this date no principal payments have been made.