On June 1, 2010, Mays Corp.loaned Farr $500,000 on a 12% note, payable in five annual instalments of $100,000 beginning January 2, 2011.In connection with this loan, Farr was required to deposit $6,000 in a non-interest-bearing escrow account.The amount held in escrow is to be returned to Farr after all principal and interest payments have been made.Interest on the note is payable on the first day of each month beginning July 1, 2010.Farr made timely payments through November 1, 2010.On January 2, 2011, Mays received payment of the first principal instalment plus all interest due.At December 31, 2010, Mays' interest receivable on the loan to Farr should be
A)$0.
B)$5,000.
C)$10,000.
D)$15,000.

Question

Quizplus · Accepted Answer

The loan was for $500,000 at 12% annual interest, which means the monthly interest rate is 1% (12% divided by 12 months). From June 1, 2010, to November 1, 2010, there are 5 months for which interest is payable (July 1, 2010, to November 1, 2010).

Interest payable each month = $500,000 x 1% = $5,000

Total interest payable for the 5 months = $5,000 x 5 = $25,000

Since Mays received the first principal installment and all interest due on January 2, 2011, there is no interest receivable at December 31, 2010, because all interest has been paid.

Therefore, Mays' interest receivable on the loan to Farr at December 31, 2010, would be $10,000 (interest for the period of July 1, 2010, to November 1, 2010), which is option C.