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Kieso Company borrowed $680,000 for six months. The annual interest rate on the loan was 9%. Kieso's fiscal year ends on December 31. Kieso borrowed the $680,000 one month prior to the end of its last fiscal year and paid the $680,000 plus interest back five months into its current fiscal year. How much interest expense, if any, would Kieso report at the end of its last fiscal year and at the end of its current fiscal year?

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Answer:

How much interest expense, if any, would Kieso report at the end of its last fiscal year and at the end of its current fiscal year?

  • at the end of the last fiscal year Kieso must report $5,100 in interest expense
  • at the end of the current fiscal year Kieso must report $25,500 in interest expense

Explanation:

Assuming that Kieso borrowed the money on November 30, the journal entry should be:

Dr Cash 680,000

    Cr Notes payable 680,000

On December 31, an adjusting journal entry to record accrued interests must be made:

Dr Interest expense 5,100

    Cr Interest payable 5,100

When Kieso paid back the debt on April 30, the journal entry should be:

Dr Notes payable 680,000

Dr Interest payable 5,100

Dr Interest expense 25,500

    Cr Cash 710,600

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