Question

I's Trial balance contains the following information: 12% Bank Loan Rs. 40,000, Interest paid Rs. 3,800. Interest debited to the Profit & Loss Account is:

• A. Rs. 4,800
• B. Rs. 5,000
• C. Rs. 5,500
• D. Rs. 1,000

Answer 1

The correct option is D Rs. 1,000

Interest paid on bank loan is an indirect expense and is debited to the profit and loss account as it is a charge against profit. In the case the total interest paid for the year is 12% of Rs 40000 i.e., 4800. The interest already paid is Rs 3800, the remaining Rs 1000 has to be paid as it is a charge against the profit. Thus Rs 1000 will be debited to the profit and loss account to pay the full amount of interest.