1. Earned $2000 of cash revenue for performing services 2.Borrowed $8000 cash fr

ID: 2337785 • Letter: 1

Question

1. Earned $2000 of cash revenue for performing services 2.Borrowed $8000 cash from the bank 3. Adjusted the accounting records to recognize a cured interest expense and the bank note. The note, issued on August 1, year one, had a one year term and a 6% annual interest rate.
Questions:
1. What is the amount of interest expense in year one?
Help Save c. Use a horizontal financial statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event i Also, in the Statement of Cash Flows column, designate the cash flows as operating activities (OA), investing activities (lA), or financing activities (FA). The first transaction has been recorded as an example. (In the Statement of Cash no effect.) increases (), decreases (D), or does not affect (NA) each element of the financial statements Flows column, select "NA" if there is Stockholders' Equity Revenue-Expense Income Flows Interest Common ned No. CashNotes ayable OA NA +NA +NA

Explanation / Answer

Horizontal Finantial Statement Model for year 1

Balance Sheet

Income Statement

Statement of Cash Flows

Assets

Liabilities

Shareholder's Equity

Revenue

Expense

Net Income

Cash

Notes payable

Interest Payable

Common Stock

Retained Earnings

N/A

Answer to question 1

Amount of Interest expense in year 1 will be $ 200

Interest is calculated as follows

Interest on $8000 for 1 year at 6% is (8000x6%)=$480

Interest will be recorded for only 5 months so Interest for 5 months will be $480/12x5= $200.

Answer to question 2

No amount of cash will be paid in year one for interest expense. This is because interest will be paid after 1 year and only adjusting entry will be made at year end to record accrued interest for the year.