The amount of interest paid in cash for the period May to August is $1,000. However, the financial reports show interest expense for the period as $750. The difference is recorded in the statement of financial position as:

Question

Quizplus · Accepted Answer

Prepaid interest (asset) is the correct answer because the company has paid more interest in cash ($1,000) than the interest expense recognized in the financial reports ($750) for the period. This indicates that the company has paid interest in advance, which is considered a prepaid expense, an asset on the balance sheet, until the expense is recognized in the income statement in future periods.

The Amount of Interest Paid in Cash for the Period