Question

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows:
Accrued interest payable $17,000 decrease
Prepaid interest 23,000 decrease
What amount of interest expense for the current year will Ness report in its income statement?
a) $ 30,000
b) $ 64,000
c) $ 76,000
d) $110,000

Answer 1

Answer:

C. $ 76,000

Explanation:

a) Accounting Entry of Cash Paid for Interest

Debit: Interest expense $ 70,000

Credit: Cash $ 70,000

b) Accounting entry of decrease in Accrued Interest Payable

Debit: Interest Payable $ 17,000

Credit: Interest Expense $ 17,000

C) Accounting Entry of Decrease in Prepaid Interest

Debit: Interest Expense $ 23,000

Credit: Prepaid Interest $ 23,000

If interest expenses of above mentioned 3 accounting entries are accumulated then answer will be as follows;

Interest Expense: $70,000-$17,000+$23,000= $ 76,000