Question

On September 1, Year 1, West Company borrowed $50,000 from Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. West Company has a calendar year-end. What is the amount of interest expense that will be reported on West's income statement for Year 1?
Multiple Choice
A. $0
B. $1,000
C. $300
D. $750

Answer 1

Answer:

Option (B) is correct.

Explanation:

Given that,

Borrowed amount by west company from valley bank = $50,000

Interest is paid annually = 6% per year

Time period = From 1st September to 31st December

                     = 4 months

The note issued by West carried an 18-month term.

Therefore,

Interest expense = Principal amount × Rate × Time period

                             = $50,000 × 6% × (4 ÷ 12)

                             = $50,000 × 0.06 × (1 ÷ 3)

                              = $1,000

Therefore, the amount of interest expense that will be reported on West's income statement for Year 1 is $1,000.