Question

Bill Darby started Darby Company on January 1, 2018. 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, 2018, had a one-year term and an 8 percent annual interest rate.

Required

A.What is the amount of interest expense to record for 2018?

B.What amount of cash was paid for interest in 2018?

C.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), or financing activities (FA). The first transaction has been recorded as an example.

Answer 1

• Requirement A: Interest Expense for 2018

>No. of month Note stayed outstanding in year 2018 = 4 months [1 Sept to 31 Dec]
>Interest Expense = $ 12,000 x 8% x 4/12 = $ 320

Answer = $ 320

• Requirement B:

>Cash paid for Interest = $ 0
>Cash for interest will be paid in the year 2019 along with Face Value of principle. Hence, nothing is paid for interest in 2018.

• Requirement C:

	Balance Sheet						Income Statement			Statement of Cash Flows
Event	Cash	Land	Notes Payable	Interest Payable	Common Stock	Retained earnings	Revenues	Expenses	Net Income
1	$16,200 Increase	NA	NA	NA	NA	$16,200 Increase	$16,200 Increase	NA	$16,200 Increase	$16,200 Increase	Operating Activity
2	$12,000 Increase	NA	$12,000 Increase	NA	NA	NA	NA	NA	NA	$12,000 Increase	Financing Activities
3	NA	NA	NA	$320 Increase	NA	NA	NA	$320 Increase	($320) Decrease	NA	NA