Question

Firewood, inc. signed a? three-year note payable for? $59,000 at? 7% annual interest. what is the interest expense for 2017 if the note was signed on august? 1, 2017?

a. ?$12,390

b. ?$1,721

c. ?$4,130

d. ?$2,065

Answer 1

The interest rate for a year or 12 months is 7% (0.07).

Counting the months from August to December is 5 months.

So the interest rate for 5 months is equivalent to:

i = 0.07 * (5/12)

i = 0.0292

The interest expense would be:

expense = $59,000 * 0.0292

expense = $1721

Therefore the answer is letter B.