Question

West Company borrowed $44,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1 income statement would be:

A. $264
B. $660
C. $880
D. $0

Answer 1

Answer:

The amount of interest expense appearing on West's Year 1 income statement would be $ 880, so the right answer is C.

Explanation:

Acording to the details, the company borrowed $44,000 on September 1, Year 1 from the Valley Bank, and the company agreed to pay interest annually at the rate of 6% per year.

The note issued carried an 18-month term.

Hence, to calcuate the amount of interest expense we have to use the following equation:

INTEREST = PRINCIPAL×RATE×TIME

INTEREST= $ 44,000×6%×4 /12(1st sept to december = 4 months)

                  = $ 880. Interest Expense.

Answer 2

Answer:

C

Explanation:

Workings

Loan amount   = $44,000

Time of loan = September 1.

Assumed year end _ December 31

Time line = 4 months . (1/3 year)

Interest rate = 6% per year

Interest expense for Year 1

6/100 * 44000 * 1/3

$880