On Oct. 1, 2021 Bianca Inc. signed a 1-year $75,000 note payable from Prime National Bank. The loan plus 4% interest is to be repaid on Sept. 30, 2022. Bianca's year-end is December 31. In its 2021 financial statements, Bianca will record an interest expense of
A) $250
B) $750
C) $3,000
D) $3,375
E) $1,000

Question

Quizplus · Accepted Answer

Bianca Inc. signed the note payable on Oct. 1, 2021, and since the loan is for a year, it will be paid back on Sept. 30, 2022, which is 12 months later.

The formula to calculate the interest expense for a note payable is:

Interest Expense = Principal x Interest Rate x Time

Where Principal is the amount of the loan, Interest Rate is the annual rate expressed as a decimal, and Time is the time period in years.

In this case, the Principal is $75,000, the Interest Rate is 4% or 0.04, and the Time is only 3 months since the loan was signed on Oct. 1, 2021, and Bianca's year-end is on Dec. 31, 2021. Thus, we have:

Interest Expense = $75,000 x 0.04 x 3/12 = $750

Therefore, the interest expense that Bianca will record in its 2021 financial statements is $750.

On Oct 1, 2021 Bianca Inc