Question

The Platte Corporation issues a 5-year note payable on January 1, 2016 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.

Which of the following shows the effect of the December 31, 2016 payment?

	Assets	=	Liab	+	Equity	Revenue	-	Expense	=	Net Inc	Cash Flow
A.	(1,156)	=	(1,156)	+	NA	NA	-	NA	=	NA	(1,156)FA
B.	(1,156)	=	(906)	+	(250)	NA	-	250	=	(250)	(906)FA/(250)OA
C.	(1,156)	=	NA	+	(1,156)	NA	-	1,156	=	(1,156)	(1,156)OA
D.	(1,156)	=	(906)	+	(250)	NA	-	250	=	(250)	(1,156)FA

2-

Rosewood Company made a loan of $7,600 to one of the company's employees on April 1, 2016. The one-year note carried a 6% rate of interest. The amount of interest revenue that Rosewood would report in 2016 and 2017, respectively would be:

Answer 1

• Question #1

Dec 31 2016 Cash payment of $ 1156 will include:

--5000 x 5% = $ 250 of Interest Expense, and
--1156 – 250 = $ 906 of Principal payment.

Hence,
-Net Income will decrease by the amount of Interest Expense.
-Liability will decrease by the amount of ‘principal payment’ $ 906, and
-Cash will decrease by the total amount paid $ 1156

Correct Answer = Option ‘B’

Assets	=	Liab	+	Equity	Revenue	-	Expense	=	Net Inc	Cash Flow
(1,156)	=	(906)	+	(250)	NA	-	250	=	(250)	(906)FA/(250)OA

• Question #2

--Interest Revenue for 2016 will be for 9 months [from 1 apr to 31 Dec]

--Interest Revenue for 2017 will be for 3 remaining months [from 1 jan to 31 mar]

Interest Revenue for 2016 = 7600 x 6% x 9/12 = $ 342

Interest Revenue for 2017 = 7600 x 6% x 3/12 = $ 114