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rchxenson
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| Posted: 04 Apr 2009 at 14:10 | IP Logged
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On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its income statement for the year, what amount should World report as interest expense?
answers were:
a - 0 b - 14200 c - 22,500 d - 30,000
I guessed b and here is what becker said about the answer I chose.
Choice "b" is incorrect. The $14,200 is exactly 60% of the correct answer, but there do not seem to be any amounts in the question that can be combined to obtain that amount. It might be just made up. It is often difficult, especially in simple questions, for the examiners to create three good wrong answers. This gives you a better chance of answering the question correctly!
I mean, I don't know if I should feel good because I could calculate an answer becker could not or what..
I just calc'd it as 1,056,800-1,000,000= 56800/4 = 14200...I realize what I did wrong regarding the question now but I thought I would share this as it's a good laugh.
question, would my answer be correct if the bond was issued at par? It looks like the bond was issued at a discount and that is why there is the added expense...not 100% sure, just started this section and I haven't done this since school :)
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spaztikenigma
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| Posted: 05 Apr 2009 at 02:35 | IP Logged
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First of all, for this question, ignore the quarterly payments. 9% interest on a million dollars for 3 months is $22,500.
(1,000,000*.09)/4
The quarterly payments is just the payment plan they agreed to. World could repay the entire principal the day after and there would be zero interest expense.
The answer is C.
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spaztikenigma
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| Posted: 05 Apr 2009 at 02:50 | IP Logged
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Basically, your understanding of the problem is way off. Becker is right. You are wrong. Don't feel good. The bond was issued at par. The question mentions nothing about discounts/premiums. Each $264,200 quarterly payment consists of an interest component and a principal component. These amounts change each quarter. I guess I'm going to have to break this down into a schedule....
First payment: Interest 22,500 & Principal 241,700 & Total 264,200
Second : Interest 17,061.75 & Principal 247,138.25 & Total 264,200
Third: Interest 11,501.14 & Principal 252,698.86 & Total 264200
Fourth: Interest 5,815.42 & Principal 258,384.58 & Total 264200
Total interest: 56,878.31(close to your interest amount)
Total principal: 999,921.69(close to note at par)
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rchxenson
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| Posted: 05 Apr 2009 at 08:34 | IP Logged
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sorry but recognizing that anything returned over the par amount is intrest isn't 'way off', but thanks for the vote of confidence.
Sarcasim doesn't come across very well on the message boards but that was some and so was the
'I don't know if I should feel good because I could calculate an answer becker could not or what..'
taken from my orginal post. If you can't laugh at yourself soemtimes when you are studying, you will probably kill yourself in the details.
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cinnamon
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| Posted: 05 Apr 2009 at 10:03 | IP Logged
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rchxenson wrote:
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sorry but recognizing that anything returned over the par amount is intrest isn't 'way off', but thanks for the vote of confidence.
Sarcasim doesn't come across very well on the message boards but that was some and so was the
'I don't know if I should feel good because I could calculate an answer becker could not or what..'
taken from my orginal post. If you can't laugh at yourself soemtimes when you are studying, you will probably kill yourself in the details.
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hey!! No worries.I have calculated the exact same answer as you have done. Actually this question is very tricky because it does not mention anything about par, premium or discounts. From my experience with loans and bonds, the principal installment is every time the same (and is calculated as an equal % of the face) and only the interest expense varies. So your thinking is close to that practice. However, I guess that the answer of 22500 was derived from a tiny tiny detail of Becker book, F5-74 (Appendix)-Notes payable bearing a reasonable interest rate are recorded at face amount and interest is accrued at the stated rate of interest (9% in our example). Hope that helps. And don't feel bad. I was caught in the same trap and was close to sending an email to Becker about including a diff. explanation on this. Besides if you don't make mistakes you don't learn.Keep your confidence up !
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