OS Environmental provides cost-effective solutions for managing regulatory requirements and environmental needs specific to the airline industry. Assume that on July 1 the company issues a one-year note for the amount of $6 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
11% December 31
9% September 30
10% October 31
7% January 31

a. Interest expense to be recorded at December 31 at 11% is $330000.

b. Interest expense to be recorded at September 30 at 9% is $135000.

c. Interest expense to be recorded at October 31 at 10% is $200000.

d. Interest expense to be recorded at January 31 at 7% is $245000.

Explanation:

a.

The year end adjusting entry will be made on the accrual basis and will match that period's expenses with revenues. The note will pay interest at maturity however it will continue to accrue interest throughout its outstanding period evenly.

Considering year end to be on December 31 and 11% interest on note, the interest expense that would be recorded in year end adjusting entry will be,

Interest expense = 6000000 * 0.11 * 6/12 = $330000

b.

Considering year end to be on September 30 and 9% interest on note, the interest expense that would be recorded in year end adjusting entry will be,

Interest expense = 6000000 * 0.09 * 3/12 = $135000

c.

Considering year end to be on October 31 and 10% interest on note, the interest expense that would be recorded in year end adjusting entry will be,

Interest expense = 6000000 * 0.10 * 4/12 = $200000

d.

Considering year end to be on January 31 and 7% interest on note, the interest expense that would be recorded in year end adjusting entry will be,

Interest expense = 6000000 * 0.07 * 7/12 = $245000

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