Simple interest is the interest earned on: a. the original principal amount involved. b. the...


Simple interest is the interest earned on:

a. the original principal amount involved.

b. the reinvested interest from prior periods.

c. both the original principal and the reinvested interested from prior periods.

d. the prior balance which includes both the interest and the principal amounts.

e. the accumulated value of an investment including all interest earned to date.


Interest accounts for the fee incurred in using the cash provided by creditors. In the debtors' part, interests are accounted for as interest expense. On the other hand, creditors treat it as interest income. When computing for the interest, the time and interest rate are considered.

Answer and Explanation:

Answer: a. the original principal amount involved.

Interest can be computed by multiplying principal to interest rate. The product obtained is again multiplied to time. Interest can be simple or compounded. In both methods, interest rate refers to the agreed rate which is usually presented as an annual rate. When the period only covered a quarter, this rate is divided to 4 to get the per quarter interest rate. The only difference between these two interest methods is the treatment of interest. In a simple interest method, it is assumed that the interest is not reinvestment and only the principal earns interest. On the other hand, compound interest reinvests the amount of interest earned and are added to the principal. In effect, the succeeding years' interest based in the total or principal and interest earned.

Learn more about this topic:

How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18

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