TJ Co.signed an eight-month, non-interest-bearing note payable on May 1, 2011.The note requires that TJ repay $8,500 on December 31, 2011.A review of TJ's bank statement indicates that the company received $7,700 on May 1, 2011 relating to this note.For the year ended December 31, 2011 the amount TJ will record as interest expense will be:

Question

Quizplus · Accepted Answer

Since the note is non-interest-bearing, the difference between the amount borrowed ($8,500) and the amount received ($7,700) is considered discount on the note. The discount is then amortized over the life of the note, which is 8 months. To find the monthly amortization, we divide the discount by the number of months, which is ($8,500 - $7,700) / 8 = $100. To find the total interest expense for the year, we multiply the monthly amortization by 12, which is $100 x 12 = $1,200. However, since the company only received $7,700 on May 1, they effectively borrowed only $7,700 instead of $8,500. Hence, the total interest expense for the year will be $1,200 x ($7,700/$8,500) = $800. Therefore, the correct answer is B.

TJ CoSigned an Eight-Month, Non-Interest-Bearing Note Payable on May 1, 2011