On May 1,2012,Mink,Inc.borrowed $10,000 by issuing a 12%,3-month note and another $10,000 by issuing a 12%,6-month note.Interest expense for the month ended May 31,2012 equals ________.
A)$(400)on the income statement
B)$(200)on the income statement
C)$(300)on the income statement
D)$(2,400)on the income statement

Question

Quizplus · Accepted Answer

Interest expense for one month is calculated by taking the annual interest rate, dividing it by 12 (for the number of months in a year), and then applying it to the principal amount. For both notes, the annual interest rate is 12%. Therefore, the monthly interest rate is 1% (12% / 12). For each $10,000 note, the monthly interest expense is $100 ($10,000 * 1%). Since there are two notes, the total interest expense for the month is $200 ($100 + $100).