On September 1,2012,Star Corp.issued a note payable to Federal Bank in the amount of $450,000.The note had an interest rate of 12 percent and called for three equal annual principal payments of $150,000.The first payment for interest and principal was made on September 1,2013.At December 31,2013,Star should record accrued interest payable of
A) $11,000.
B) $12,000.
C) $16,500.
D) $18,000.

Question

Quizplus · Accepted Answer

The note was issued on September 1, 2012, and the first payment was made on September 1, 2013, which means that interest accrues for four months (September - December).

To calculate the accrued interest, we need to determine how much interest accrues each month.

12% annual interest translates to 1% monthly interest (12%/12 months).

The total amount of the note payable is $450,000, so the monthly interest is:

$450,000 x 1% = $4,500

For four months, the accrued interest is:

$4,500 x 4 months = $18,000

However, the first payment includes both interest and principal, so we need to subtract the principal payment from the accrued interest:

$18,000 - $150,000 = -$132,000

This negative amount means that Star Corp. actually overpaid on their first payment and do not owe any accrued interest at December 31, 2013.

Therefore, the answer is B.