Question

Exercise 9-2A Effects of recognizing accrued interest on financial statements LO 9-1 Bill Darby started Darby Company on January 1, Year 1. The company experienced the following events during its first year of operation 1. Earned $1,100 of cash revenue. 2. Borrowed $2.200 cash from the bank 3. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on September 1 Year 1 had a one-year term and an 7 percent annual interest rate. Required a. What is the amount of interest payable at December 31, Year 12 b. What is the amount of interest expense in Year ? c. What is the amount of interest paid in Year d. Use a horizontal statements model to show how each event affects the balance sheet income statement, and statement of cash flows. Indicate whether the event increases or decreases (D) each element of the financial statements. In the Statement of Cash Flows column Classify the cash flows as operating activities (OA), investing activities (A) or financing activities (FA) Columns for events that have no effect on any of the elements should be left blank. The first transaction has been recorded as an example

Answer 1

a) Interest payable at December 31, Year 1= $2200*7%*4/12= $51

b) Interest expense in Year 1= $2200*7%*4/12= $51

c) The amount of cash was paid for interest in Year 1= $0

As the interest will be not paid in Year 1 but in Year 2 with the principal amount.

d)

DARBY COMPANY

Statements Model for Year 1

Event No.

Balance Sheet

Income Statement

Statement of Cash Flows

Assets

=

Liabilities

+

Stockholders' Equity

Revenue

-

Expenses

=

Net Income

Cash

=

Notes Payable

+

Interest Payable

+

Common Stock

+

Retained Earnings

1.

I

=

+

+

+

I

I

-

=

I

I

OA

2.

I

=

I

+

+

+

-

=

I

FA

3.

=

+

I

+

+

D

-

I

=

D

NA