keesha company borrows $120,000 cash on november 1 of the current year by signing a 180 - day, 7%, $120,000…
keesha company borrows $120,000 cash on november 1 of the current year by signing a 180 - day, 7%, $120,000 note. complete this question by entering your answers in the tabs below. what is the amount of interest expense in the current year and the following year from this note? note: use 360 days a year. do not round intermediate calculations and round final answers to the nearest whole dollar.
Answer
Explanation:
Step1: Calculate total interest through maturity
The simple - interest formula is $I = P\times r\times t$, where $P$ is the principal amount, $r$ is the annual interest rate, and $t$ is the time in years. Here, $P=$120000$, $r = 7%=0.07$, and $t=\frac{180}{360}=0.5$ years. $I = 120000\times0.07\times0.5=$4200$
Step2: Determine time in current year
The note is signed on November 1. In the current year, the number of days from November 1 to December 31 is 61 days. So the time in the current year $t_1=\frac{61}{360}$ years.
Step3: Calculate interest expense in current year
$I_1=P\times r\times t_1 = 120000\times0.07\times\frac{61}{360}\approx$1423$
Step4: Calculate interest expense in following year
The time in the following year $t_2=\frac{180 - 61}{360}=\frac{119}{360}$ years. $I_2=P\times r\times t_2=120000\times0.07\times\frac{119}{360}\approx$2777$
Answer:
| Total through maturity | Interest Expense Current Year | Interest Expense Following Year | |
|---|---|---|---|
| Principal | $$120000$ | $$120000$ | $$120000$ |
| Rate (%) | $7%$ | $7%$ | $7%$ |
| Time | $0.5$ years | $\frac{61}{360}$ years | $\frac{119}{360}$ years |
| Total interest | $$4200$ | $$1423$ | $$2777$ |