Frankenstein Enterprises received two notes from customers for sales that Frankenstein made in 2018. The notes included:
Note A: Dated 5/31/2018, principal of $120,000 and interest due 3/31/2019.
Note B: Dated 7/1/2018, principal of $200,000 and interest at 8% annually, due on 4/1/2019.
Frankenstein had accrued a total of $14,400 interest receivable from these notes in its 12/31/2018 balance sheet.
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Assume Frankenstein views the financing component of these sales to be significant. What amount of interest revenue would Frankenstein earn on these notes during 2019?

Question

Frankenstein Enterprises received two notes from customers for sales that Frankenstein made in 2018. The notes included: 
Note A: Dated 5/31/2018, principal of $120,000 and interest due 3/31/2019.
Note B: Dated 7/1/2018, principal of $200,000 and interest at 8% annually, due on 4/1/2019.
Frankenstein had accrued a total of $14,400 interest receivable from these notes in its 12/31/2018 balance sheet.
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Assume Frankenstein views the financing component of these sales to be significant. What amount of interest revenue would Frankenstein earn on these notes during 2019?

Quizplus · Accepted Answer

Note B accrued interest for six months during 2018: $200,000 × .08 × 6/12 = $8,000. The rest of the interest accrued, $6,400 was from Note A, which was held for seven months in 2018. So, we have the following: $120,000 × annual interest rate × 7/12 = $6,400. Thus, the annual interest rate on Note A would be ($6,400/120,000) × 12/7 = 9.14%. During 2019, Note A is held for three months, so it earns $120,000 × .0914 × 3/12 = $2,742. Note B also is held for three months and earns 8% annually, so $200,000 × .08 × 4/12 = $4,000. So the total interest revenue earned in 2019 is $6,742.

Frankenstein Enterprises Received Two Notes from Customers for Sales That