Question

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

1. Earned $1,200 of cash revenue.

2. Borrowed $2,100 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 6 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).

Answer 1

Required a.

Amount of Interest Payable as at Dec 31, Year 1 = $2100 * 6% * 4 / 12 = $24

Required b

Amount of Interest Expense as at Dec 31, Year 1 = $24

Required c

Amount of Interest paid = $0.

Required d

Horizontal Statement Model

Particulars	Balance Sheet	Income Statement	Cash Flow Statement
Particulars	Assets	Liabilities and equity	Income	Expenses	Operating Activities	Investing activities	Financing activities
Earned $1200 cash revenue	Increses	Increses	Increses	NA	Increses	NA	NA
Borrowed $2100 cash from bank	Increses	Increses	Na	NA	NA	NA	Increases
Accrued Interest recorded	NA	NA	NA	Increase	NA	NA	NA

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