On June 1, Davis Inc. issued an $84,000, 5%, 120-day note payable to Garcia Company. Assume that the fiscal year of Garcia ends June 30. Using the 360-day year, what is the amount of interest revenue recognized by Garcia in the following year?

a. $1,061

b. $1,600

c. $4,200

d. $700

a. $1,061

Explanation:

Since the Davis Inc has issued note payable for 120 days, therefore the interest revenue shall be recognised only in respect of 120 days and the interest rate given in the question for 360 days shall be accordingly apportioned for 120 days and following calculations shall be made:

Interest revenue=Amount issued*interest rate*120/360

Interest revenue=$84,000*5%*120/360=$1,400

In this year the loan was only outstanding for 29 days, i. e. from June 2 to June 30 and in the following year the note payable will be outstanding 91 days, so interest revenue for the following year shall be calculated as follows:

Interest revenue for following years=$1,400*91/120=$1,061

So the answer is a. $1,061