Question

Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interest- bearing note payable with interest payable at maturity. The amount of interest expense to be reported during 2011 is which of the following?
a) $250.
b) $300.
c) $500.
d) $750.

Answer 1

Answer:

c) $500.

Explanation:

The computation of the interest expense to be recognized for the year 2011 is shown below;

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

= $25,000 × 8% × (3 months ÷ 12 months)  

= $500

The 3 months is taken from October 1 to December 31

Hence, the correct option is c. $500