Reference no: EM13572291

Troop Co. frequently borrows from the bank to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Troop repaid each loan on its scheduled maturity date.

Date of Maturity Term of

Loan       Amount         Date         Loan

11/1/95   $10,000      10/31/96     1 year

2/1/96     30,000        7/31/96     6 months

5/1/96     16,000         1/31/97     9 months

Troop records interest expense when the loans are repaid. Accordingly, interest expense of $3,000 was recorded in 1996. If no correction is made, by what amount would 1996 interest expense be understated?

Solution

Actual interest expense:

Date               Amount     Rate     Time

11/1/95 Loan $10,000 ´ 12% ´ 10/12 mos = $1,000

2/1/96 Loan 30,000 ´    12% ´ 6/12 mos =       1,800

5/1/96 Loan 16,000 ´    12% ´ 8/12 mos =       1,280 <-------Question

                                                                       4,080

Stated interest expense on the cash basis.   3,000

Understated interest expense                       $1,080