Jane's Donut Co. borrowed $200,000 on January 1, 2013, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2015. In connection with this note, Jane's should report interest expense at December 31, 2013, in the amount of:

Question

Quizplus · Accepted Answer

Since the note started on January 1, 2013, and ends on January 1, 2015, it is a two-year note. Therefore, the interest expense for the first year (ending on December 31, 2013) can be calculated by multiplying the outstanding principal by the interest rate:

$200,000 x 0.12 = $24,000

Thus, Jane's should report interest expense at December 31, 2013, in the amount of $24,000.