Question

Leach Company borrowed $70,000 cash by issuing a note payable on June 1, Year 1. The note had an 6 percent annual rate of interest and a one-year term to maturity. Required a. What amount of interest expense will Leach recognize for the year ending December 31, Year 1? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) Interest expense b. Show how the recognition of interest on December 31, Year 1, affects the accounting equation. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Enter any decreases to account balances with a minus sign.) LEACH COMPANY Accounting Equation for Year 1 Equity Liabilities Assets Common Stock Retained Earnings Interest Payable Notes Event Cash Payable June 01 Dec. 31 + c. What amount of cash will Leach pay for interest expense in Year 1?

D. What is the amount of interest payable as of December 31 Year 1. (Do not round intermediate calculations. Round your answer to the nearest whole dollar)

E. What amount of cash will Leach pay for interest expense in Year 2.

F. What amount of interet expense will Leach recognize in Year 2? (Do not round intermediate calculations. Round youe answer to the nearest whole dollar)

G. What is the amount of interest payable as of December 31, Year 2?

Answer 1

a. Interest expense recognized in year 1 = 70,000 * 6% * 7 /12 = 2450

b.

	Assets	=	Liabilities			Equity
Event	Cash	=	Notes Payable	+	Interest Payable	Common Stock	+	Retained earnings
June 01	70,000		70,000
Dec 31					2450			-2450

c. No cash is paid in year 1 since it is issued in the middle of the year and interest is payable annually.

Cash paid = $0

d. Interest payable = $2450

e. Interest expense in Year 2 = 70,000 *6% = 4200

f. Interest expense in year 2 = 4200 - 2450 = 1750

g. Interest payable = $0 [ since the note is redeemed in June year 2]