Question

On July 1, Alton Co. issued an $89,800, 7%, 120-day note payable to Seller Co. Assume that the fiscal year of Alton Co. ends July 31. Using a 360-day year in your calculations, what is the amount of interest expense recognized by Alton in the current fiscal year? When required, round your answer to the nearest dollar.

Select the correct answer.

$1,572

$1,048

$6,286

$524

Answer 1

On July 1, Alton Co. issued an $89,800, 7%, 120-day note payable to Seller Co. And the fiscal year ends on 31st July.

Thus the interest will be for 30 days only which needs to be accrued as per the accrual principles being interest an expenses debited and the interest payable as a liability will be credited.

Here the interest will be for 30 days i.e from 1st July to 31st July.

Interest expense = Notes value × interest rate × 30 / 360.

Interest expense = $ 89800 × 7 % × 30 / 360 = $ 523.83. i e 524 ( rounded off).

Thus the amount of interest expense recognized by Alton in current fiscal year = $ 524.

Thus the correct Option is---------D i.e $ 524.