interest expense and interest accrual

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    Topic
  • #193366
    donnychristal
    Participant

    CPA-00475 a bond issued on June 1, of the current year, has interest payment dates of April 1 and October 1. Bond interest expense for the current year ended December 1 is for a period of :

    A. seven months

    B. six months

    C. three months

    D. four months

    the answer is a but I chose c. the explanation is ‘interest expense is recognized for the entire period from bond issuance through the fiscal year end. three months would only be the time period from October 1 through December 1 and this amount represents the interest accrual.’

    I am really confused. I looked back at the book for example JE of bonds issued between interest date and they show ‘bond interest expense (payable)’. can someone help explain this a little better? what’s the difference between interest expense and accrual??

    AUD: 64, 71, 73, 72, 78
    FAR: 75 (expired), 79
    BEC: 89
    REG: 76

    FINGERS CROSSED

    FAR - 75
    AUD - 64/71
    BEC - 85

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  • #662096
    Anonymous
    Inactive

    The call of the question is asking for interest expense as of December 1st. Expense is recognized when incurred, in this case that would be 7 months of interest expense as of year end. June – December.

    Interest accrual is booked when you have incurred interest expense, but have not paid it. So as of December year end, you have 2 months of interest accrued: October and November.

    #662097
    Missy
    Participant

    When you book an expense, the other side of the JE is either going to be an accrual (we're not ready to pay this yet), accounts payable (we will be paying it within one operating cycle) or cash (check goes out immediately).

    Old timer,  A71'er since 2010.

    Finance manager/HR manager

     

     

    Licensed Massachusetts Non Reporting CPA since 2012
    Finance/Admin/HR Manager

    #662098
    Missy
    Participant

    Another important distinction is the expense is your P&L (Income statement) entry, while the other options are your balance sheet entry.

    Old timer,  A71'er since 2010.

    Finance manager/HR manager

     

     

    Licensed Massachusetts Non Reporting CPA since 2012
    Finance/Admin/HR Manager

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