On Oct. 1, 2017 Bonita, Inc. signed a 1-year $75,000 note payable from First National Bank. The loan plus 6% interest is to be repaid on Sept. 30, 2018. Bonita's year-end is December 31. In its 2017 financial statements Bonita will record interest expense of

Question

Quizplus · Accepted Answer

Bonita signs the note payable on October 1, 2017 and is required to pay back the loan plus 6% interest on September 30, 2018. Since the year-end for Bonita is December 31, 2017, it will have only accrued interest for three months (October – December) at the end of the year.

The formula for interest expense is: 
Interest Expense = Principal x Interest Rate x Time

Time is the portion of the year for which interest is being accrued, which in this case is 3 months or ¼ of the year.

Therefore, Interest Expense = $75,000 x 6% x ¼ = $1,125.

The correct answer is B, $1,125, as Bonita will record $1,125 of interest expense in its 2017 financial statements.

On Oct 1, 2017 Bonita, Inc