Question

Bill Darby started Darby Company on January 1, Year 1. The company experienced the following events during its first year of operation: Earned $1,900 of cash revenue. Borrowed $3,000 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 8 percent annual interest rate.

What is the amount of interest expense in Year 1?

What amount of cash was paid for interest in Year 1?

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), or if there is no effect, leave the cell blank. 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

Interest Expense in Year 1			=	$ 3000 x 8% x 4/12
			=	$   80.00
Cash paid for interest in Year 1			=	Nil

			Notes		Interest		Common		Retained					Net	Statement of
Event No.	Cash	=	Payable	+	Payable	+	Stock	+	Earnings	Revenues	-	Expenses	=	Income	Cash Flows
1)	$ 1,900.00								$ 1,900.00	$ 1,900.00				$ 1,900.00	$ 1,900.00	OA
2)	$ 3,000.00		$ 3,000.00												$ 3,000.00	FA
3)					$    80.00				$     -80.00			$    80.00		$     -80.00