Question

West Company borrowed $48,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 9% 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:

Answer 1

$1,440

Explanation:

Given:

Borrowed amount by west company from valley bank = $48,000

Interest is paid annually = 9% per year

Time period = From 1st September to 31st December

= 4 months

The note issued by West carried an 18-month term.

Therefore,

Interest expense = Principal amount × Rate × Time period

= $48,000 × 9% × (4 ÷ 12)

= $48,000 × 0.09 × (1 ÷ 3)

= $1,440

Therefore, the amount of interest expense that will be reported on West's income statement for Year 1 is $1,440.