Using the straight-line method, what is the monthly interest expense for a 12-month note at 6% on a $100,000 principal?

Using the straight-line method, what is the monthly interest expense for a 12-month note at 6% on a $100,000 principal?

• A. (Principal × 6%) / 12
• B. Principal × 6% per month
• C. Carrying amount × monthly rate
• D. Entire annual interest in the first month

Answer: (A)

Under straight-line treatment, interest expense is spread evenly over the life of the note. The total interest for the year is the principal times the annual rate: 100,000 × 0.06 = 6,000. Dividing by 12 months gives 6,000 ÷ 12 = 500 per month. So the monthly interest expense is 500. This matches taking the principal times the annual rate and dividing by 12, i.e., (principal × 6%) ÷ 12. The other options misstate the timing or the rate: using 6% per month would overstate the rate, recognizing the whole year’s interest in the first month would not spread the cost, and while carrying amount × monthly rate could yield 500 in this simple case, straight-line focuses on distributing total annual interest evenly rather than applying a changing carrying amount each month.

Under straight-line treatment, interest expense is spread evenly over the life of the note. The total interest for the year is the principal times the annual rate: 100,000 × 0.06 = 6,000. Dividing by 12 months gives 6,000 ÷ 12 = 500 per month.

So the monthly interest expense is 500. This matches taking the principal times the annual rate and dividing by 12, i.e., (principal × 6%) ÷ 12.

The other options misstate the timing or the rate: using 6% per month would overstate the rate, recognizing the whole year’s interest in the first month would not spread the cost, and while carrying amount × monthly rate could yield 500 in this simple case, straight-line focuses on distributing total annual interest evenly rather than applying a changing carrying amount each month.