Question

On September 1, 2010, Lowe Co. issued a note payable to National Bank in the amount of $600,000, bearing interest at 12%, and payable in three equal annual principal payments of $200,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2011. At December 31, 2011, Lowe should record accrued interest payable ofa. $24,000.b. $22,000.c. $16,000.d. $14,667.

Answer 1

Answer:

c. $16,000

Explanation:

The computation of the accrued interest payable is shown below:

= (Total amount - first payment) × (interest rate) × (number of months ÷ total number of months in a year)

= ($600,000 - $200,000) × 12% × (4 months ÷ 12 months)

= $400,000 × 12% × (4 months ÷ 12 months)

= $16,000

The four months is calculated from the September 1, 2011 to December 31, 2011

And, the prime rate is of no use. So, it would not be considered in the computation part.

Answer 2

If on September 1, 2010, Lowe Co. issued a note payable to National Bank in the amount of $600,000, bearing interest at 12%. At December 31, 2011, Lowe should record accrued interest payable of: c. $16,000

Using this formula

Accrued interest payable=[(Note payable-Annual principal payment × Interest) × month]

Where:

Note payable=$600,000

Annual principal payment=$200,000

Interest=12%

Month= 4 (September 1- December 31)

Let plug in the formula

Accrued interest payable=[($600,000-$200,000×12%)×4/12]

Accrued interest payable=[($400,000×12%)×4/12]

Accrued interest payable=$48,000×4/12

Accrued interest payable=$16,000

Inconclusion if on September 1, 2010, Lowe Co. issued a note payable to National Bank in the amount of $600,000, bearing interest at 12%. At December 31, 2011, Lowe should record accrued interest payable of: c. $16,000.

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