What amount of interest should be charged to expense?

Question

Quizplus · Accepted Answer

To calculate interest expense, we need to first calculate the weighted average interest rate of all the notes payable.

Weighted Average Interest Rate = [(Interest rate x Principal) + (Interest rate x Principal) + (Interest rate x Principal)] / Total Principal

Weighted Average Interest Rate = [(0.12 x 2,400,000) + (0.1 x 4,800,000) + (0.11 x 9,000,000)] / 16,200,000

Weighted Average Interest Rate = 0.105 or 10.5%

Next, we need to calculate the interest expense for the year.

Interest Expense = Weighted Average Interest Rate x Average Amount of Notes Payable Outstanding During the Year

Average Amount of Notes Payable Outstanding = [(Beginning Balance + Ending Balance) / 2]

10% Note Payable: [(4,800,000 + 4,800,000) / 2] = 4,800,000 
11% Note Payable: [(9,000,000 + 9,000,000) / 2] = 9,000,000

Interest Expense = 0.105 x [(4,800,000 x 12/12) + (4,800,000 x 6/12) + (9,000,000 x 12/12)]

Interest Expense = $1,053,585

Therefore, the correct answer is C.

What Amount of Interest Should Be Charged to Expense