Question

Abardeen corporation borrowed $90,000 from the bank on october 1, year 1. The note had an 8 percent annual rate of interest and matured on march 31, year 2. Interest and principal were paid in cash on the maturity date. Required a. What amount of cash did abardeen pay for interest in year 1? b. What amount of interest expense was recognized on the year 1 income statement? c. What amount of total liabilities was reported on the december 31, year 1, balance sheet? d. What total amount of cash was paid to the bank on march 31, year 2, for principal and interest? e. What amount of interest expense was reported on the year 2 income statement?.

Answer 1

a) The amount of cash that Abardeenn Corporation paid for interest in year 1 is $0.

b) The amount of interest expense recognized on the year 1 income statement is $1,800 ($90,000 x 8% x 3/12).

c) The amount of total liabilities reported on the December 31, year 1 balance sheet is $91,800 ($90,000 + $1,800).

d) The total amount of cash paid to the bank on March 31, Year 2, for principal and interest is $93,600 ($90,000 + ($90,000 x 8% x 6/12).

e) The amount of interest expense reported on the year income statement is $1,800 ($90,000 x 8% x 3/12).

How is interest calculated?

Interest can be computed by applying the interest rate to the amount of notes payable based on the period under coverage.

For example, the interest amount for a six month is not the same as the interest amount for a full year, as interests are always prorated.

Data and Calculations:

Amount of Note Payable = $90,000

Annual interest rate = 8%

Maturity date = March 31, Year 2

Maturity period = 6 months

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