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Hello Chris!
Need your help for a question in the KAPLAN kit.
At 1 October 20X4, BK had accrued interest payable of $12,000. During the year ended 30 September 20X5, BK charged finance costs of $41,000 to its statement of profit or loss, including unwinding a discount relating to a provision stated at its present value of $150,000 at 1 October 20X4. The closing balance on accrued interest payable account at 30 September 20X5 was $15,000, and BK has a discount rate of 6%.
-The answer is $29,000.
– Kindly show how to obtain the answer. The working in the kit is quite complicated and difficult to follow.Thanks.
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?
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