Question

Interest is debited to asset account in ______________.

• A. Insurance policy method
• B. Diminishing balance method
• C. Depletion method
• D. Annuity method

Answer 1

The correct option is D Annuity method

By using an asset, one loses not only the money spent on acquiring it but also the interest which would have been earned on the money. Therefore, depreciation should cover not only the cost of the asset but also an appropriate amount for interest. This is done in annuity method. Interest is calculated on the book value of the asset at the proper rate and debited to asset. The amount is credited to interest account, which then goes to the credit side of the profit and loss account.