Question

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 $1,300 of cash revenue.
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 September 1, Year 1, had a one-year term and an 10 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.

Answer 1

Answer:

Darby Company

a. The amount of the interest payable at December 31, Year 1 is $80.

b. The amount of the interest expense in Year 1 is $80.

c. The amount of interest paid in Year 1 is $0.

d. Horizontal Statements Model:

Balance Sheet                       Income Statement                     Statement of

                                                                                                 Cash Flows

Assets = Liabilities + Equity  Income = Revenue - Expenses

1. +$1,300 = 0 +        $1,300  $1,300  = $1,300                        OA cash inflow

2. +$2,400 = $2,400+ 0                                                           FA cash inflow

3. 0           =        $80 + ($80)  ($80)   = 0       -      ($80)          None

$3,700 = $2,480 +  $1,220  $1,220 = $1,300 -    $80  

Explanation:

a) Data and Calculations:

1. Cash $1,300 Revenue $1,300

2. Cash$2,400 10% Bank Note Payable $2,400

3. Interest Expense $80 Interest Payable $80 )$2,400 * 10% * 4/12)