OS Environmental provides cost-effective solutions for managing regulatory requirements and environmental needs specific to the airline industry. Assume that on July 1 the company issues a one-year note for the amount of $5.4 million. Interest is payable at maturity.

Required:
Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:

Interest Rate Fiscal year end Interest Expense
1. 11% December 31
2. 9% September 30
3. 10% October 31
4. 7% January 31

Solution and Explanation:

The calculation of determining the interest expense that must be recorded in a year end adjusting entry is as follows;

Interest  Year       Issue   Months   Note Value        Interest

Rate        End         date                                              Expense

11%        Dec-31Jul-016     5,400,000          297,000

9%        Sep-30Jul-013     5,400,000          121,500

10%        Oct-31Jul-014     5,400,000          180,000

7%         Jan-31Jul-017     5,400,000          220,500

The following formula is to be used while calculating the interest expense

(Note Face Value * interest Rate * time period)/12

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