Question

Johny started Bowling Company on January 1, Year 1. The company experienced the following events during its first year of operation:

1. Earned $16,200 of cash revenue.
2. Borrowed $12,000 cash from the bank.
3. 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), decreases (D), or does not affect (NA) each element of the financial statements. In the Cash Flows column, designate the cash flows as operating activities (OA), investing activities (IA), financing activities (FA), or not affected (NA). The first transaction has been recorded as an example.

Answer 1

a.)	Amount of interest payable at December 31, Year 1	$ 320	=12000*8%*4/12
b.)	Amount of interest expense in Year 1	$ 320	=12000*8%*4/12
c.)	Amount of interest paid in Year 1	$ 0

d.)		Assets	=	Liabilities			+	Stockholder' Equity			Amount $
		Cash	=	Interest Payable	+	Note Payable	+	Revenue	-	Expense	Cash Flow Statement
	(1)	16,200	=		+		+	16,200	-		Operating Activities
	(2)	12,000	=		+	12,000	+		-		Financing Activities
	(3)		=	320	+		+		-	320	Operating Activities
	Total	28,200	=	320	+	12,000	+	16,200	-	320