On July 8, Jones Inc. issued an $80,000, 6%, 120-day note payable to Miller Company. Assume that the fiscal year of Jones ends on July 31. Using the 360-day year, what is the amount of interest expense recognized by Jones in the current fiscal year?

Question

Quizplus · Accepted Answer

We can start by calculating the interest expense using the following formula:

Interest expense = Principal x Interest rate x Time

Where:

Principal = $80,000
Interest rate = 6%
Time = 120/360 = 1/3 years (since we're using a 360-day year)

Plugging in the values, we get:

Interest expense = $80,000 x 6% x 1/3 = $1,600

However, since the fiscal year of Jones ends on July 31 and the note was issued on July 8, the amount of interest expense recognized in the current fiscal year will be for 24 days only (from July 8 to July 31).

To calculate the interest expense for 24 days, we can use the following formula:

Interest expense = Principal x Interest rate x Time
Time = 24/360 = 1/15 years

Plugging in the values, we get:

Interest expense = $80,000 x 6% x 1/15 = $307

Therefore, the amount of interest expense recognized by Jones in the current fiscal year is $307. Option C is the correct answer.