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On July 1, 2018, Ross-Livermore Industries issued nine-month notes in the amount of $400 million....

Question:

On July 1, 2018, Ross-Livermore Industries issued nine-month notes in the amount of $400 million. Interest is payable at maturity.

Required:

Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:

Interest Rate Fiscal Year-End
1. 12% December 31
2. 10% September 30
3. 9% October 31
4. 6% January 31

Interest Expense:

The expense to be considered for the period is computed by multiplying the face value of the note payable with the period and the periodic interest rate.

Answer and Explanation:

Determine the amount of interest expense that should be recorded in a year-end adjusting entry as follows: -

Computation for Interest Expense (in million)
Assumptions Interest Rate (a) Fiscal Year-End Period (in months) (b) Interest Expense (a x b/12 x 400 million)
1 12% Dec-31 6 $24
2 10% Sep-30 3 $10
3 9% Oct-31 2 $6
4 6% Jan-31 7 $14


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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