Mann Corp.’s liability account balances at June 30, Year 2, included a 10% note payable in the amount of $3.6 million. The note is dated October 1, Year 1, and is payable in three equal annual payments of $1.2 million plus interest. The first interest and principal payment was made on October 1, Year 2. In Mann’s June 30, Year 3, balance sheet, what amount should be reported as accrued interest payable for this note?
A. $60,000
B. $90,000
C. $270,000
D. $180,000

D. $180,000

Explanation:

Accrued interest on the note payable at the balance sheet date is the carrying amount of the note multiplied by the interest rate on the note. Because the first payment was made 10/1/Year 2, the carrying amount of the note is $2,400,000 ($3,600,000 - $1,200,000). Also, interest has accrued for only 9 months since the first payment. As a result, accrued interest payable is $180,000 [$2,400,000 × 10% × (9 months ÷ 12 months)].

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