Ben Bradley started Bradley Company on January 1, Year 1. The company experience

Question

Ben Bradley started Bradley Company on January 1, Year 1. The company experienced the following events during its first year of operation: 1. Earned $2,700 of cash revenue for performing services. 2. Borrowed $4,200 cash from the bank. 3. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on August 1, Year 1, had a one-year term and a 6 percent annual interest rate. Required a. What is the amount of interest expense in Year 1? nterest expense b. What amount of cash was paid for interest in Year 1? Interest payment

Explanation / Answer

a) Amount of interest expense in year 1 = 4200*6%*5/12 = $105

b) Interest payment = $0

c) Accounting equation:

Bradley Company Horizontal financial statement model for year 1 Balance sheet Income statement Statement of cash flows Assets = Liabilities + Stockholder's equity Revenue - Expense = Net income Event No Cash = Notes payable + Interest payable + Common Stock + Retained earnings 1 I = NA + NA + NA + I I - NA = I I OA 2 I = I + NA + NA + NA NA - NA = NA I FA 3 NA = NA + I + NA + D NA - I = D D OA

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