On July 1, Atlantic Cruise Lines issues a $100,000, eight-month, 6.25% note. Interest is payable at maturity. What is the amount of interest expense that the company would record in a year-end adjusting entry on December 31?
Question
On July 1, Atlantic Cruise Lines issues a $100,000, eight-month, 6.25% note. Interest is payable at maturity. What is the amount of interest expense that the company would record in a year-end adjusting entry on December 31?
Solution
To calculate the interest expense that Atlantic Cruise Lines would record in a year-end adjusting entry on December 31, we need to follow these steps:
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First, we need to understand the terms of the note. The note is for $100,000 at an annual interest rate of 6.25%. However, the note is only for eight months, and we are looking for the interest expense at the end of six months (from July 1 to December 31).
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Next, we calculate the annual interest on the note. This is done by multiplying the principal amount of the note ($100,000) by the annual interest rate (6.25%).
6,250
This is the total interest that would be paid if the note were held for a full year.
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However, we are only interested in the interest for six months. To find this, we need to prorate the annual interest by the fraction of the year that has passed (6/12).
3,125
So, the amount of interest expense that the company would record in a year-end adjusting entry on December 31 is $3,125.
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