Question

Bill Darby started Darby Company on January 1, Year 1. The company experienced the following events during its first year of operation: Earned $16,200 of cash revenue. Borrowed $12,000 cash from the bank. 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 8 percent annual interest rate. Required a. What is the amount of interest payable at December 31, Year 1? b. What is the amount of interest expense in Year 1? c. What is the amount of interest paid in Year 1? 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 (I) 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 (IA) 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

Answer:

Please see below and attached

Explanation:

a. What is the amount of interest payable at December 31, year 1

= $12,000 × 8% × 4/12

= $320

b. What is the amount of interest expense in year 1.

= $12,000 × 8% × 4/12

= $320

c. What is the amount of interest paid in year 1.

The amount of cash paid for interest is $0. This is because it will be made at the time of maturity in year 2.

D. Use a horizontal statements model to show how each event affects the balance sheet, income statement and statement of cash flows.

• Please find attached solution to this question.