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.

On August 1, Year 1, Bellisa Company issued a $15,000 4%, 1-year note to Citizens Bank. Which of the following entries reflects the adjustment required as of December 31, Year 1?

Multiple Choice

• Interest Payable	600
  Interest Expense		600

• Interest Expense	250
  Notes Payable		250

• Interest Expense	250
  Interest Payable		250

• Interest Expense	600
  Interest Payable		600

Vargas Company purchased a computer for $6,200 on January 1, Year 1. The computer is estimated to have a 5-year useful life and a $2,100 salvage value. What adjusting entry would Vargas record on December 31, Year 1 to recognize expense related to use of the computer?

Multiple Choice

• Depreciation Expense	820
  Accumulated Depreciation		820

• Depreciation Expense	820
  Computer		820

• Depreciation Expense	1,240
  Accumulated Depreciation		1,240

• Accumulated Depreciation	820
  Depreciation Expense		820

Manhattan Company recorded an adjusting entry to accrue interest owed of $850 as of December 31, Year 1. When the related note was paid during Year 2, the company paid $1,550 in interest. Which of the following journal entries correctly records this Year 2 transaction? (Assume that the entry to record the payment of the note itself was recorded in a separate journal entry.)

Multiple Choice

• Interest Expense	700
  Interest Payable	850
  Cash		1,550

• Interest Expense	1,550
  Cash		1,550

• Interest Expense	1,550
  Cash		850
  Interest Payable		700

• Interest Expense	700
  Cash		700

Manhattan Company recorded an adjusting entry to accrue interest owed of $850 as of December 31, Year 1. When the related note was paid during Year 2, the company paid $1,550 in interest. Which of the following journal entries correctly records this Year 2 transaction? (Assume that the entry to record the payment of the note itself was recorded in a separate journal entry.)

Multiple Choice

• Interest Expense	700
  Interest Payable	850
  Cash		1,550

• Interest Expense	1,550
  Cash		1,550

• Interest Expense	1,550
  Cash		850
  Interest Payable		700

• Interest Expense	700
  Cash		700

Answer 1

Franklin Company

Interest on Note Payable = $40000 x 12% x 5/12 = 2000

Interest Expense a/c                  Dr.    2000             (Part of Retained earnings i.e., equity)

            To Interest Payable                      2000         (Part of Liabilities)

(Being Interest accrued)

Increase liabilities and decrease equity by $2,000

Kendall Company

Closing Retained Earnings = Beginning Retained Earnings + Net Income - Dividends

                                        = 18500 + (26900 - 16500 ) - 6000 = 22900

Bellisa Company

Interest on Note Payable = $15000 x 4% x 5/12 = 250

Interest Expense a/c                  Dr.    250           

            To Interest Payable                      250       

(Being Interest accrued)

Vargas Company

Depreciation expense = (Cost - Salvage value)/ life of asset

                                    =( 6200 - 2100 ) / 5 = 820

Depreciation Expense a/c            Dr     820

          To Accumulated Depreciation           820

(Being Depreciation charged to Computer)

Manhattan

Interest Expense a/c              Dr. 750

Interest Payable a/c               Dr. 800

            To Cash                                 1550

(Being Interest expense paid in cash)