A Better Mousetrap
The company sold merchandise to a customer on December 1, 2019, for $100,000. The customer paid with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company's accounting period ends on December 31.
-Refer to A Better Mousetrap. What amount should the company recognize as interest revenue on the maturity date of the note?

Question

Quizplus · Accepted Answer

The company should recognize interest revenue based on the effective interest method. Under this method, the interest revenue is calculated by multiplying the outstanding balance of the note by the effective interest rate, which is the annual interest rate divided by the number of periods in a year.

In this case, the outstanding balance of the note on maturity date (June 1, 2020) is $100,000, and the effective interest rate is 9%/2 = 4.5% (since the term is 6 months or half a year).

Therefore, interest revenue = $100,000 x 4.5% = $4,500.

The correct answer is C.

A Better Mousetrap The Company Sold Merchandise to a Customer on December 1