Bill Darby started Darby Company on January 1, Year 1. The company experienced the following events during its first year of operation: Earned $1,300 of cash revenue. Borrowed $2,300 cash from the bank. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on September 1, Year 1, had a one-year term and an 10 percent annual interest rate. Required a. What is the amount of interest payable at December 31, Year 1

Darby Company

The amount of interest payable at December 31, Year 1 is:

$76.67

Explanation:

a) Data and Calculations:

Cash Revenue = $1,300

Bank Note Payable = $2,300

Interest rate on Bank Note = 10%

Issue date of bank note = September 1, Year 1

Term of bank note = 1 year

Amount of interest payable on December 31, Year 1:

= $2,300 * 10% * 4/12 = $76.67

b) The amount of interest payable on the loan totals $230 ($2,300 * 10%).  However for Year 1, the interest payable is reduced to 4 months (September 1 to December 31, Year 1), amounting to $76.67.  This implies that the remaining interest ($153.33) will be payable in the period between January 1 and August 31 in Year 2.  In accordance with the accrual and matching principles of generally accepted accounting principles, interest expense must be accrued to the period when the expense is incurred and matched to the revenue it has generated.