Question

Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjustment, dated December 31, Year 1, to record accrued interest expense impact the elements of the financial statements?
Multiple Choice

Decrease assets and decrease retained earnings by $2,000

Increase liabilities and decrease equity by $2,000

Increase liabilities and decrease equity by $1,600

Decrease equity and increase liabilities by $4,800

The following account balances were taken from the adjusted trial balance of Kendall Company:

Revenues $ 26,900
Operating Expenses 16,500
Dividends 6,000
Retained Earnings 18,500
What is the Retained Earnings account balance that will be included on the post-closing trial balance?

Multiple Choice

$28,900.

$22,900.

$4,400.

$10,400.

Answer 1

Answer:

1. Increase liabilities and decrease equity by $2,000

2. $22,900

Explanation:

1. The journal entry to record the accrued interest expense is shown below:

Interest expense A/c Dr $2,000

             To Interest payable A/c $2,000

(Being accrued interest adjusted)

The computation is shown below:

= Principal × rate of interest × number of months ÷ (total number of months in a year)  

= $40,000 × 12% × (5 months ÷ 12 months)

= $2,000

Increase liabilities and decrease equity by $2,000

2. The computation of the ending retained earning balance is shown below:

The ending balance of retained earning = Beginning balance of retained earnings + net income - dividend paid

= $18,500 + $10,400 - $6,000

= $22,900

The net income is computed below:

= Revenues - operating expenses

= $26,900 - $16,500

= $10,400