Answer:
Darby Company
The amount of interest payable at December 31, Year 1 is:
$76.67
Explanation:
a) Data and Calculations:
Cash Revenue = $1,300
Bank Note Payable = $2,300
Interest rate on Bank Note = 10%
Issue date of bank note = September 1, Year 1
Term of bank note = 1 year
Amount of interest payable on December 31, Year 1:
= $2,300 * 10% * 4/12 = $76.67
b) The amount of interest payable on the loan totals $230 ($2,300 * 10%). However for Year 1, the interest payable is reduced to 4 months (September 1 to December 31, Year 1), amounting to $76.67. This implies that the remaining interest ($153.33) will be payable in the period between January 1 and August 31 in Year 2. In accordance with the accrual and matching principles of generally accepted accounting principles, interest expense must be accrued to the period when the expense is incurred and matched to the revenue it has generated.
