300603 Flashcards
Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Loeb repaid each loan on its scheduled maturity date.
Date of Loan Amount Maturity Date Term of Loan
11/01/X1 $ 5,000 10/31/X2 1 Year
02/01/X2 15,000 07/31/X2 6 Months
05/01/X2 8,000 01/31/X3 9 Months
Loeb records interest expense when the loans are repaid. As a result, interest expense of $1,500 was recorded in 20X2. If no correction is made, by what amount would 20X2 interest expense be understated?
$720
$640
$620
$540
Correct 20X2 Interest:
Loan 1 $ 5,000 x 12% x 10/12 = $500
Loan 2 $15,000 x 12% x 6/12 = 900
Loan 3 $ 8,000 x 12% x 8/12 = 640
Total interest expense $2,040
Recorded to date 1,500
Understatement $ 540
