On July 1, Costa Rica Adventures issues a $190,000, eight-month, 6% 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, Costa Rica Adventures issues a $190,000, eight-month, 6% 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 Costa Rica Adventures 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 $190,000, it has an interest rate of 6%, and it is for a period of eight months.
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Next, we need to calculate the annual interest on the note. This is done by multiplying the principal amount of the note (190,000 * (6/100) = $11,400. This is the total interest for a full year.
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However, the note is only for eight months and we are asked to calculate the interest expense at the end of the year (December 31), which is six months into the note. So, we need to adjust the annual interest to reflect this six-month period. We do this by multiplying the annual interest by the fraction of the year that has passed (6/12). So, the calculation is 5,700.
So, the amount of interest expense that Costa Rica Adventures would record in a year-end adjusting entry on December 31 is $5,700.
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