Question

g 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

Step-by-step explanation:

As the question says, companies need to report revenue and expenses on their income statement based on what they earned and incurred during the accounting period. This is the Accrual principle in accounting.

The company gets a return of 6% after a year but this return has to be reflected monthly as it earned.

In a year the return is;

= 6% * 100,000

= $6,000

The investment was made on September 1st so from then to December 31st is 4 months.

The interest earned in this first year is therefore;

= 6,000 * 4/12 months

= $2,000

This is the interest revenue that should be recorded on the December 31st year ending income statement of the year.