The company borrowed $1 million on 1 June 2015,with principal and interest to be repaid in three years' time.The interest rate is 12 per cent per annum.
-The effect on the 30 June 2016 financial statements was:

Question

Quizplus · Accepted Answer

As the loan was borrowed on 1 June 2015, the company would have incurred one year's interest expense by 30 June 2016. Therefore, the company should recognize the interest expense in its financial statements for the year ended 30 June 2016, resulting in a decrease in profit (as interest expenses are deducted from revenue to arrive at operating profit) and an increase in liabilities (as the loan will now be due in two years' time instead of three, so it is classified as a current liability). Therefore, option A is correct.

The Company Borrowed $1 Million on 1 June 2015,with Principal