Question

OS Environmental provides cost-effective solutions for managing regulatory requirements and environmental needs specific to the airline industry. Assume that on July 1 the company issues a one-year note for the amount of $5.2 million. Interest is payable at maturity.
Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:

Interest rate Fiscal year-end Interest expense
12% December 31
10% September 30
9% October 31
6% January 31

Answer 1

Answer:

In accrual basis accounting, expenses are recorded in the period when their matching revenues are obtained.

In this case, even if the full interest will be paid at maturity, interest expense will still be recorded in each period according to the information that we are given in the question.

Interest expense to be recorded by December 31

5,200,000 * 0.12 = 624,000 / 2 = 312,000

Interest expense to be recorded by September 30

5,200,000 * 0.10 = 520,000 * 3/12 = 130,000

Interest expense to be recorded by October 31

5,200,000 * 0.09 = 468,000 * 4/12 = 156,000

Interest expense to be recorded by January 31

5,200,000 * 0.06 = 312,000 * 7/12 = 182,000