On 1 October 2014, Master's Co. borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the principal amount will not be due for five years. Interest is to be paid monthly on the first day of each month, beginning 1 November 2014. With respect to this borrowing, Master's 31 December 2014, statement of financial position included only a long-term note payable of $500,000. As a result:

Question

Quizplus · Accepted Answer

The interest accrued from 1 November 2014 to 31 December 2014 is calculated as follows:
$500,000 × 10% × 2/12 = $8,333
Since interest is to be paid monthly, the interest expense for December 2014 is $4,167 ($8,333 ÷ 2). 
Therefore, at 31 December 2014, there is an accrued interest payable of $4,167 which is not included in the financial statements. Thus, liabilities are understated by $4,167 accrued interest payable.

On 1 October 2014, Master's Co ×\times× 10 ×\times× 1/12 = $4,167

On 1 October 2014, Master's Co $\times$ 10 $\times$ 1/12 = $4,167