Effects of recognizing accrued interest on financial statementsScott Perkins started Perki...

Effects of recognizing accrued interest on financial statements

Scott Perkins started Perkins Company on January 1, 2012. The company experienced the fol­lowing events during its first year of operation.

1.Earned $1,500 of cash revenue for performing services.

2.Borrowed $2,400 cash from the bank.

3.Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on August 1, 2012, had a one-year term and a 7 percent annual interest rate.

Required

a.What is the amount of interest expense in 2012?

b. What amount of cash was paid for interest in 2012?

c. 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 (I), decreases (D), or does not affect (NA) each element of the financial statements. In the Cash Flows column, designate the cash flows as operating activities (OA), investing activities (IA), or financing ac­tivities (FA). The first transaction has been recorded as an example.