Question

On July 1, 2016, Allen Company signed a $150,000, one-year, 6 percent note payable. The principal and interest will be paid on June 30, 2017. How much interest expense should be reported on the income statement for the year ended December 31, 2016?

a. $0.
b. $2,250.
c. $9,000.
d. $4,500.

Answer 1

Correct answer is D, $4,500

Step-by-step explanation:

The principal amount of $150,000 multiplied by 6% interest annually is $9,000 (interest from July 1, 2016 to June 30, 2017). Let's compute the applicable rates to be reported in income statement for the year ended December 31, 2016.

$150,000 x 6% = $9,000 (Annual expense)

$9,000 x 6/12 = $4,500 (interest from July 1, 2016 to December 1, 20160