On September 1, Year 1, West Company borrowed $50,000 from Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. West Company has a calendar year-end. What is the amount of interest expense that will be reported on West's income statement for Year 1?

Multiple Choice

A. $0

B. $1,000

C. $300

D. $750

Option (B) is correct.

Explanation:

Given that,

Borrowed amount by west company from valley bank = $50,000

Interest is paid annually = 6% per year

Time period = From 1st September to 31st December

= 4 months

The note issued by West carried an 18-month term.

Therefore,

Interest expense = Principal amount * Rate * Time period

= $50,000 * 6% * (4 : 12)

= $50,000 * 0.06 * (1 : 3)

= $1,000

Therefore, the amount of interest expense that will be reported on West's income statement for Year 1 is $1,000.