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Seattle Company issued a $90,000 face value discount note payable to First Federal Bank on September 1, Year 1. The note had a 4% discount rate and a one-year term.

-What is the amount of interest expense appearing on the Year 1 income statement?
A)$1,200
B)$3,600
C)$2,400
D)$7,200

Question

[The following information applies to the questions displayed below.]

Seattle Company issued a $90,000 face value discount note payable to First Federal Bank on September 1, Year 1. The note had a 4% discount rate and a one-year term.

-What is the amount of interest expense appearing on the Year 1 income statement?
A)$1,200
B)$3,600
C)$2,400
D)$7,200

Quizplus · Accepted Answer

Discount = $90,000 × 0.04 × 1 = $3,600
Four months (Sept.1-Dec.31)have passed.
Year 1 interest expense = Amortization of discount = Discount of $3,600 × (4 ÷ 12)= $1,200

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