Phipps Company borrowed $24,000 cash on October 1, Year 1, and signed a nine-­month, 9% interest bearing note payable with interest payable at maturity. The amount of interest expense to be reported during Year 2 is ?

$1620

Explanation:

Assumption:  The company follows calendar year for accounting purpose.

Given: Amount borrowed = $24000

           Rate of interest = 9% per annum

Interest relating to year 1 ending on Dec 31, = 24000 × 9% ×  

                                                                         = $540

The journal entry would be:

Interest expense                                                      Dr. 540                    

     To interest payable                                                          540

(being interest payable recorded)

In the second year , the interest expense would be the remaining i.e

total interest $24000 × 9% ×  = $1620

Interest Expense                                         Dr.    1620

Interest Payable                                          Dr.      540

Notes Payable                                             Dr. 24,000

      To Cash A/C                                                              26,160

(Being notes payable and interest paid recorded)

Hence, the amount of interest expense to be reported in year 2 is $1620

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