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?
A)$833.33
B)$1,000
C)$10,000
D)$2,500
E)$4,000

Question

Quizplus · Accepted Answer

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.

On January 1, Larry's Lobsters, Which Uses the Accrual Basis