Question

Universal Travel Inc. borrowed $509,000 on November 1, 2018, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2018, in the amount of:

Answer 1

Answer:

$5,090

Explanation:

The matching principle in accounting requires use to record incomes and expenses in the period in which they occur or incur.

Therefor, Universal Travel Inc. should report interest that expired between November 1, 2018 and December 31, 2018 as at December 31, 2018 report

Interest payable calculation :

Period = November 1, 2018 to December 31, 2018,

           = 2 months expired

Annual interest = $509,000 x 6% x 12/12

                          = $30,540

Interest payable = $30,540 x 2/12

                            = $5,090

Conclusion :

Interest payable at December 31, 2018 should be reported as $5,090