On July 8, Alton Co. issued an $80,000, 6%, 120-day note payable to Seller Co. Assume that the fiscal year of Alton Co. ends July 31. Using the 360-day year in your calculations, what is the amount of interest expense recognized by Alton in the current fiscal year?

Question

Quizplus · Accepted Answer

To calculate the interest expense, we need to use the formula: Interest Expense = Principal x Rate x Time

In this case, the principal is $80,000, the rate is 6%, and the time is the fraction of the 120-day period that falls within the current fiscal year of Alton Co.

Since Alton's fiscal year ends on July 31, we need to determine how many days of the 120-day period occur before July 31.

120 days - 23 days (from July 8 to July 31) = 97 days

So the time period for which interest expense will be recognized in the current fiscal year is 97/360 of a year.

Therefore, the interest expense is:

$80,000 x 6% x 97/360 = $306.67

The nearest option is C.