Question

A company’s average monthly loan balance for the past year is $18,350,000. The interest rates on the loan fluctuated between 6.5% and 7.5% during the year.

The income statement shows interest expense of $1,150,000 for the year.

Answer these four following questions:

1. Show how you would calculate an interest expense Expectation for the interest expense account and show your expected interest expense amount.

2. Compare your expectation of interest expense with the income statement amount and show the difference.

3. If you have determined the tolerable difference is 10% of the company’s recorded amount compare the tolerable dollar amount of difference using this % with your calculated difference above and show the amount your calculated difference is either above or below the 10%tolerable amount.

4.Should you accept the income statement interest expense account as fairly stated or not and why.

Answer 1

1. To calculate an interest expense expectation we will calculate the average interest rate by adding the 2 interest rates and dividing it by 2.

expected interest rate = (6.5% + 7.5%)/2 = 7%

interest expense expectation will be 7% of 18,350,000 = $ 1,284,500

2. The actual interest expense is less than the expected interest rate. The difference in the expectation and actual interest expense =

• $1,284,500 - $1,150,000 = $134,500

3. The 10% tolerable dollar amount of difference = 10% of 1,284,500 = $ 128,450

Difference in actual calculated difference and tolarable difference = $134,500 - $128,450 = $6,050

So the actual interest expense is $ 6,050 bove the tolerable amount.

4. No, The interest wxpense should not be accepted because it is going above the tolerable amount of difference.