On March 1, 2004, Fine Co.

borrowed $10,000 and signed a two-year note bearing

interest at 12% per annum compounded annually. Interest is payable in full at
maturity on February 28, 2006.
What amount should Fine report as a liability for accrued interest at December 31,
2005?
The 2005 ending balance in accrued interest payable therefore includes interest on
2004's accrued interest:
2004: $10,000(.12)(10/12) = $1,000
2005: ($10,000 + $1,000)(.12)(12/12) = 1,320
Total accrued interest payable, December 31, 2005 $2,320