On June 1, Davis Inc. issued an $84,000, 5%, 120-day note payable to Garcia Company. Assume that the fiscal year of Garcia ends June 30. Using the 360-day year, what is the amount of interest revenue (rounded) recognized by Garcia in the following year?

Question

Quizplus · Accepted Answer

First, we need to find the interest on the note payable:
Interest = Principal x Rate x Time
= $84,000 x 5% x 120/360
= $1,400
Garcia received $1,400 in interest revenue from Davis ($84,000 x 5%) for the 120-day period. Since Garcia's fiscal year ends on June 30 and the note was issued on June 1, only one month's interest revenue ($1,400/3) will fall into Garcia's fiscal year. Therefore, the amount of interest revenue recognized by Garcia in the following year will be $1,400/3 = $466.67 or rounded to $1,062.