Question

Kermit Inc. borrows $250,000 by signing a 90-day, 9% note on October 22^nd. The accounting period ends on December 31.

Instructions

What is the amount of interest expense recognized on December 31? Should the company accrue any interest? Include your computations in your answer.

What is the amount of cash paid on December 31 for the note? Include your computations in your answer.

What is the amount of interest revenue earned that should be recorded on this note on December 31? Include your computations in your answer.

At what date should this note be repaid and how much interest expense should be recognized at that date? Include your computations in your answer.

Answer 1

Given information

Kermit Inc. borrows $250,000 by signing a 90-day, 9% note on October 22nd. The accounting period ends on December 31.

here we assume some points to solve this question

1. The 9% interest is compound interest compounding yearly.

2. Kermit is liable to pay all the interest money with the principal amount after 90 days.

3. The year is having 365 days.

4. Considering general practices of credit note followed in INDIA for solving question.

now

What is the amount of interest expense recognized on December 31? Should the company accrue any interest?

so interest expense recognized on 31st December is for 70 days (9 days of October + 30 days of November + 31 days of December)

let's jump to formula

filling the values

compound interest = 250000(1+0.9)70/365- 250000

= 4315.07 $

amount of interest recognized 4315.07 dollars on 31st December.

And no, the company will not accrue any interest as on 31st December.

What is the amount of cash paid on December 31 for the note? Include your computations in your answer.

solution -

Generally at the end of the period borrower pay all the principal with the interest in credit note. So in this case borrower pay the whole amount of interest with the principal amount after finishing 90 days.

What is the amount of interest revenue earned that should be recorded on this note on December 31? Include your computations in your answer.

solution -

In practices followed in the market credit note consist only the amount of total interest of the loan period which is here 90 days. It is not related to financial year-end or something. So the amount of interest revenue earned on 31st December will not be recorded on credit note.

At what date should this note be repaid and how much interest expense should be recognized at that date? Include your computations in your answer.

solution -

The note will be repaid on 20th January.

total interest recognized at the end of the period

again formula

= 250000 (1+0.9)90/365- 250000

= $ 6226.03