Question

You and several classmates are studying for the next accounting examination. They ask you to answer the following questions: 1. If cash is borrowed on a $54,000, 10-month, 10% note on August 1, how much interest expense would be incurred by December 31? $ 2. The cash register total including sales taxes is $42,315, and the sales tax rate is 5%. What is the sales taxes payable? $ 3. If $42,315 is collected in advance on November 1 for 5-month magazine subscriptions, what amount of subscription revenue should be recognized on December 31?

Answer 1

Answer:

a. $2,250

b. $2,015

c. $16,926

Explanation:

1. The computation of interest expense is shown below:

= Principal × rate × (number of months ÷ total number of months)

= $54,000 × 10% × 5 months ÷ 12 months

= $2,250

The five months are computed from August 1 to December 31

2. The computation of sales tax payable is shown below:

= Cash register × sales tax rate ÷ (100 + sales tax rate)

= $42,315 × 5% ÷ (100 + 5%)

= $42,315 × 5 ÷ 105

= $2,015

3. The computation of the subscription revenue is shown below:

= Advanced collected × (number of months ÷ given months)

= $42,315 × (2 months ÷ 5 months)

= $16,926

The two months are computed from November 1 to December 31