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Hi, It is a tricky one so don't worry too much that you've not got the answer at the first attempt and find the answer itself a challenge to understand. To solve it, I'd use a T-account for interest payable. The payable balance is a liability so the opening 12,000 is on the credit side and the closing 15,000 balance is on the debit side. The difficulty arises with the unwinding of the discount which is a charge to profit and loss of 9,000 (65 x 150,000), so is included within the 41,000 finance cost but is not related to the interest payable. The entry posted would have been to DR Finance cost 9,000 CR Provision 9,000. So to work out the charge to profit and loss that relates to the interest payable then we need to deduct the 9,000 from the 41,000 to give 32,000. If we process the 32,000 as a credit to the T-account (DR SPL CR Interest payable) and balance the T-account then you will get to the 29,000. Thanks

Why do we need to process the 32,000 as a credit to the T-account? -If out of the $41,000, $9,000 relate to unwinding of discount which is non cash, then the remaining $32,000 should be 'cash' finance cost. (DR finance cost and CR cash). How come it's a credit on the T-account?

Hi, The 32,000 relates to the interest expense for the year, whereby the interest payable (liability) is credited to increase the amount owed to the finance provider. Thanks

Therefore, as per your explanation, the $32,000 is an interest expense and not an interest paid?

Hi, Yes, you need to differentiate between the expense which is recognised in profit and loss, and the amount paid which is an outflow in the statement of cash flows. Thanks