The amount paid for the securities is reported as a short-term investment, and the difference between the amount paid and the amount at which the securities will be subsequently resold is reported as:

Question

Options

• Amutual agreed upon income
• Bmoney market payment
• Cdollar-repurchase payment
• Dinterest income

• A
  4% (1)
• B
  15% (4)
• C
  4% (1)
• D
  78% (21)

Explanation

Option D is correct because in a repurchase agreement (repo), the buyer of the securities is effectively providing a short-term collateralized loan - the difference between the lower purchase price and the higher repurchase price represents the return on that loan, which is interest income by economic substance and accounting treatment.

Options A, B, and C are all fabricated terms with no standing in accounting standards or financial terminology - none of them appear in GAAP, IFRS, or standard finance vocabulary, which is a telltale sign they are distractors.

Memory tip: Think of a repo as a pawnshop in reverse - you hand over cash, hold securities as collateral, and get back slightly more cash than you gave. That "extra" is always interest, no matter what the transaction is called.

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