Exercise 9-1A: Recognizing Accrued Interest Expense

Abardeen Corporation borrowed $90,000 from the bank on October 1, Year 1. The note had an 8 percent annual rate of interest and matured on March 31, Year 2. Interest and principal were paid in cash on the maturity date.

Required

a. What amount of cash did Abardeen pay for interest in Year 1?

b. What amount of interest expense was recognized on the Year 1 income statement?

c. What amount of total liabilities was reported on the December 31, Year 1, balance sheet?

d. What total amount of cash was paid to the bank on March 31, Year 2, for principal and interest?

e. What amount of interest expense was reported on the Year 2 income statement?

Exercise 9-2A: Effects of Recognizing Accrued Interest on Financial Statements

Bill Darby started Darby Company on January 1, Year 1. 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, Year 1, had a one-year term and an 8 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 Statement of 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.

Exercise 9-3A: Recording Sales Tax

Vail Book Mart sells books and other supplies to students in a state where the sales tax rate is 8 percent. Vail Book Mart engaged in the following transactions for Year 1. Sales tax of 8 percent is collected on all sales.

1. Book sales, not including sales tax, for Year 1 amounted to $250,000 cash.
2. Cash sales of miscellaneous items in Year 1 were $85,000, not including tax.
3. Cost of goods sold was $190,000 for the year.
4. Paid $117,000 in operating expenses for the year.
5. Paid the sales tax collected to the state agency.

Required

a. What is the total amount of sales tax Vail Book Mart collected and paid for the year?

b. Prepare the journal entries for the preceding transactions.

c. What is Vail Book Mart’s net income for the year?