On September 1, 2005, Cobb Co. issued a note payable to National Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000.

On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2006.

At December 31, 2006, Cobb should record accrued interest payable of

I know the answer is (900000-300000)*12%*4/12, but why we don't need the prime rate 11% in here.

Interest is constantly changing. When you have a contract for a note at a fixed rate, the changing interest rates don't matter.

It's not really any different than if you bought a car and got a loan for it, and the price of the car changes after you bought yours. You bought it at whatever price you negotiated, and other prices, or subsequent prices don't change the contract you made.