A company issued a £200,000 8% loan note on 1 September. The year end is 31 December and no interest has yet been paid. What finance cost is recorded for the year and what is the year-end accrual?
Answer and explanation
Correct answer: D. Finance cost £5,333 and accrual £5,333
- Step 1: Annual interest = 8% × £200,000 = £16,000.
- Step 2: The loan was outstanding for 4 months (September to December): £16,000 × 4/12 = £5,333.
- Step 3: None was paid, so the charge is also owed as an accrued liability.
Answer
Finance cost £5,333 and accrual £5,333.
Why not the others: Finance cost £16,000 and accrual £16,000: This charges a full year's interest although the loan was in place for only four months. Finance cost £5,333 and accrual nil: The interest has not been paid, so there is an accrual equal to the charge. Finance cost nil and accrual £5,333: Interest is an expense of the period that it relates to, so it is charged and not just accrued.
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