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