[Jott]

question: On March 1, 20X0, Fine Co. borrowed $10,000 and signed a 2-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 20X2. What amount should Fine report as a liability for accrued interest on December 31, 20X1?

answer: Accrued interest on December 31, 20X1:
For 20X0: $10,000 x .12 x (10/12) = $1,000
For 20X1: ($10,000 + $1,000) x .12 = 1,320
——
Total $2,320

why is the interest compounded at calendar year end and not after 12 months?

[Tim]

It's the same answer…

20X1:
First 2 months interest (before compounding interest) – $10,000 x (2/12) x .12 = $200
Last 10 months interest (after compounding interest) – ($10,000 + $1,200) x (10/12) x .12 = $1,120
Total – $1,320

I'm sure there's a mathematical explanation for why it works out either way you to do it.

[Anonymous]

the interest for 2001 is calculated for the entire year…Not sure I understand your question:) You calculate the interest for 2010, for the 10 months the loan is o/s and then to compound it, you add that amount to the principal and calculate your interest on that, for the entire 2001….

[Author]

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