[vmop30]

Allen Corp.'s liability account balances at June 30, 2007 included a 10% note payable in the amount of $2,400,000. The note is dated October 1, 2005 and is payable in three equal annual payments of $800,000 plus interest. The first interest and principal payment was made on October 1, 2006. In Allen's June 30, 2007 balance sheet, what amount should be reported as accrued interest payable for this note?

I am a little confused, I thougth it was 60,000 because they have already paid the first year and only 9 months have passed since then, but I got this question wrong so if someone can help me aswer it.

[royk]

You took the interest of just the annual payment (800,000), and not of the entire remaining principal. The accrued interest is the interest that has accumulated since the principal investment OR the last interest payment (in this case, the interest paid on October 1, 2006).

So, the remaining principal after the first payment is 1,600,000 (2,400,000 - 800,00). Accrued interest is equal to the fraction of the year (9 months have passed since the last interest payment, so 9/12 = 3/4) multiplied by the remaining principal (1,600,000) multiplied by the interest rate (10%, so .1).

(3/4)*(1,600,000)*(.1) = 120,000.

You use the remaining principal amount because that is what is gaining interest in those 9 months, not just the 800,000 installment Allen Corp is due to pay.

[shaima]

The interest expense is fixed each year @ $240,000. For the second year only 9 months passed before preparing the balance sheet and the amount of interest is to be paid on October 1, 2007, so you need to make an adjustment for the interest 240,000 * 9/12= $180,000 this amount will be recorded as accrued interest or interest payable because it will be paid shortly after almost 4 months and it will be recorded as current liabilities on June 1, 2007 balance sheet.