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 $5.4 million. Interest is payable at maturity.
Required:
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
1. 11% December 31
2. 9% September 30
3. 10% October 31
4. 7% January 31

Answer 1

Solution and Explanation:

The calculation of determining the interest expense that must be recorded in a year end adjusting entry is as follows;

Interest  Year       Issue   Months   Note Value        Interest

Rate        End         date                                              Expense

11%         Dec-31 Jul-01 6     5,400,000          297,000

9%        Sep-30 Jul-01 3     5,400,000          121,500

10%        Oct-31 Jul-01 4     5,400,000          180,000

7%         Jan-31 Jul-01 7     5,400,000          220,500

The following formula is to be used while calculating the interest expense

(Note Face Value * interest Rate * time period)/12