Question

Time period is important in accounting. Companies need to report revenue and expenses on their income statement based on what they earned and incurred during the accounting period. Assume the company had invested $100,000 in an interest-bearing investment on September 1st of this year. The investment earns 6% interest, but the interest doesn't get paid out until the end of the first six months. What, if any, interest revenue should the company record on their December 31st year ending income statement of this year

Answer 1

Answer: $2,000

Explanation:

The question alludes to the Accrual principle of Accounting that states that companies need to report revenue and expenses on their income statement based on what they earned and incurred during the accounting period.

The investment is to earn 6% annually which means that every year it is to show returns of;

= 6% * 100,000

= $6,000

On a monthly basis therefore this should be;

= 6,000 / 12

= $500

They invested on September 1st which means that they would have been invested for 4 months by December 31.

The interest for the year is therefore;

= 4 * 500

= $2,000