Answer:
A. The amount of interest expense to record for 2018 is $320, calculated as follows: $12,000 x 8% x 4/12 = $320.
B. No amount of cash was paid for interest in 2018; i.e. = $0.00
C. Effect of each transaction on balance sheet, income statement, and statement of cash flows:
1. Cash Revenue of $16,200
Balance Sheet - Cash and Retained Earnings are increased by $16,200.
Income Statement - Revenue is increased by $16,200.
Statement of Cash Flows: Cash inflows are increased by $16,200. It is an operating activity (OA)
2. Bank Note Payable of $12,000 with accrued interest of $320 for 2018:
Balance Sheet - Cash and Notes Payable are increased with $12,000; Interest on Notes Payable is increased by $320 and Retained Earnings decreased by $320.
Income Statement: Net Income is decreased by $320.
Statement of Cash Flows: Cash inflows are increased by $12,000. It is a financing activity (FA).
Explanation:
1. Cash revenue increases net income and Cash Account balance, and reflects positively on the cash flows for operating activities.
2. Notes Payable increases Cash Account balance (an asset) and Notes Payable (a liability). It also increases the cash inflow for financing activities.
3. Accrued Interest on Notes Payable increases liability and decreases the net income, which reflects negatively on the Retained Earnings (Equity). It does not affect the statement of cash flows as no disposal had been made yet.
