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Category - Accounting

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On January 1, Larry’s Lobsters, which uses the accrual basis of accounting, borrowed $100,000 to purchase a new boat. The interest rate is 10%. Larry’s Lobsters pays interest on a quarterly basis, with the first payment due on April 1. What will be the interest expense on the January income statement?
  1. $833.33
  2. $1,000
  3. $10,000
  4. $2,500
  5. $4,000
Explanation
Answer - A - The interest expense on the income statement for the month of January is $833.33.

100,000 x 10% = $10,000 annually in interest
$10,000 / 12 = $833.33 per month

Key Takeaway: In the accrual basis of accounting, expenses are reported during the month they are recognized. Each month the business will recognize 1/12 of the interest expense in this example. Other annual expenses will also be divided by 12 to reach a monthly cost.
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