The following 12%,$1,000 notes were issued on December 1.Which of the following is the correct method of calculation for the interest accrued as of December 31 of the same year on each of the notes described?
A) Interest on a 4-month note is calculated as: $1,000 x 12% x 1/12.
B) Interest on a 3-month note is calculated as: $1,000 x 12% x 1/3.
C) Interest on a 4-month note is calculated as: $1,000 x 12% x 1/4.
D) Interest on a 2-year note is calculated as: $1,000 x 12% x 1/24.

Question

Quizplus · Accepted Answer

The correct method of calculation for interest accrued on a note is to multiply the principal amount by the interest rate and the time period for which the interest is being calculated.

For a 4-month note, the time period for which the interest is being calculated is 1/3 of a year (4 months is 1/3 of a year). Therefore, the correct calculation for the interest accrued as of December 31 is:

$1,000 x 12% x 1/3 = $40

The Following 12%,$1,000 Notes Were Issued on December 1