[rlsrapp]

I have copied and pasted a question I came across while doing ninja MCQ. According to the answer explanation, the $5,000 loan was outstanding for 10 out of 12 months. Is that a typo, or am I missing something? It appears to me that it was outstanding for 12 out of 12 months.

Here is the question and the accompanying answer…

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

Date of Loan Amount Maturity Date Term of Loan

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11/01/X1 $ 5,000 10/31/X2 1 Year

02/01/X2 15,000 07/31/X2 6 Months

05/01/X2 8,000 01/31/X3 9 Months

Loeb records interest expense when the loans are repaid. As a result, interest expense of $1,500 was recorded in 20X2. If no correction is made, by what amount would 20X2 interest expense be understated?

Correct 20X2 Interest:

Loan 1 $ 5,000 x 12% x 10/12 = $500

Loan 2 $15,000 x 12% x 6/12 = 900

Loan 3 $ 8,000 x 12% x 8/12 = 640

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Total interest expense $2,040

Recorded to date 1,500

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Understatement $ 540

AUD - 88
BEC - 85
FAR - 79
REG - 88

"Struggle as hard as you can for whatever you believe in."

[Anonymous]

I'm wondering if you've figured out this problem yet?

[Author]

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