Question

Clayton Company borrowed $6,000 from the State Bank on April 1, Year 1. The one-year note carried a 6% rate of interest. The amount of interest expense that Clayton would report in Year 1 and Year 2, respectively would be______

Answer 1

Answer:

$270 and $90

Explanation:

The computation of the interest expense is shown below:

Year 1

= $6,000 × 6% × 9 months ÷ 12 months

= $270

Year 2

=  $6,000 × 6% × 3 months ÷ 12 months

= $90

We assume the year is ended on December 31

So, for the first year, the interest is to be charged on 9 months and for year 2 it would be charged for the remaining 3 months