Question

On April 1, 2012, Allen Company signed a $100,000, one-year, 6 percent note payable. At due date, March 31, 2013, the principal and interest will be paid. Interest expense and interest receivable should be reported on the income statement (for the year ended December 31, 2012) as ___________.
A) $6,000.
B) $3,000.
C) $4,500
D) $1,500

Answer 1

Answer:

C) $4,500.

Explanation:

The interest expense for one year is $6,000 (100,000 * 6%). The Accrual Principle of Accounting requires entities to record expenses in a period in which they are incurred and not when paid. So, we have to record the interest accrued for nine months that is from April to December.

⇒ Interest Expense at Year End = (6,000 / 12) * 9 = $4,500.