Question

Bill Darby started Darby Company on January 1, Year 1. The company experienced the following events during its first year of operation: Earned $1,100 of cash revenue. Borrowed $2,200 cash from the bank. 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 9 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) or decreases (D) each element of the financial statements. In the Statement of Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA) or financing activities (FA). Columns for events that have no effect on any of the elements should be left blank. The first transaction has been recorded as an example.

Answer 1

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Bill Darby
Workings		Note
Bank note	2,200.00	A
Annual Interest rate	9%	B
Annual Interest amount	198.00	C=A*B
Monthly Interest	16.50	D=C/12
Months from Sep to Dec	4.00	E
Interest payable at December 31, Year 1	66.00	F=D*E
Interest expense in Year 1	66.00	See F
Interest paid in Year 1	-

Because total interest will be paid along with bank note next year so in year 1 no interest is paid and only liability is created.

Horizontal Statement

Asset

=

Liability

Shareholder's Equity

Income Statement

Cashflow

Answer a

Cash

=

Bank Note

+

Common Shares

+

Revenue

-

Expense

=

Income

1

1,100.00

=

+

+

1,100.00

-

=

1,100.00

OA

2

2,200.00

=

2,200.00

+

+

-

=

-

FA