Question

Styles ragraph DO IT! 10.1a (LO 1), AP You and several classmates are studying for the next accounting examination. They ask you to answer the following questions. 1.If cash is borrowed on a $60,000, 9-month, 10% note on August 1, how much interest expense would be incurred by December 31? 2.The cash register total including sales taxes is $42,000, and the sales tax rate is 5%. What is the sales taxes payable? 3.If $42,000 is collected in advance on November 1 for 6-month magazine subscriptions, what amount of subscription revenue should be recognized on December 31?

Answer 1

1.

Principal = $60,000

Annual interest rate = 10%

Time = 5 months

Interest expense = Principal x Annual interest rate x Time

= 60,000 x 10% x 5/12

= $2,500

2.

Cash register total including sales tax payable = $42,000

Sales tax rate = 5%

Sales tax payable = Cash register total including sales tax payable x Sales tax rate/(100 + Sales tax rate)

= 42,000 x 5/105

= $2,000

3.

Subscription revenue received for 6 months = $42,000

Hence, subscription revenue for 2 months to be recognized on December 31 = 42,000 x 2/6

= $14,000

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Answer 2

The 3rd question must not we multiply the amount by 2/12 instead of 2/6 ?