Question

On March 1, Year1, Fine Co borrowed $10,000 and signed a two year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, Year 3. What amount should Fine report as a liability for accrued interest at December 31, Year 2?

a) 800

b) 0

c) 1,824

d. 1,024

Answer 1

$2,320

Accrued interest payable at 12/31/Y2 is interest expense which has been incurred by 12/31/Y2 but has not yet been paid by that date. The note was issued on 3/1/Y1 so one year and ten months of unpaid interest on 12/31/Y2.

($10,000 x 12%) + ($11,200 x 12% x 10/12) = $2,320