Exercise 9-1B: Recognizing accrued interest expense

Union Corporation borrowed $60,000 from the bank on November 1, Year 1. The note had a 6 percent annual rate of interest and matured on April 30, Year 2. Interest and principal were paid in cash on the maturity date.

Required

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

b. What amount of interest expense was reported 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 April 30, Year 2, for principal and interest?

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

Exercise 9-2B Effects of recognizing accrued interest on financial statements

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

1. Earned $3,000 of cash revenue for performing services.
2. Borrowed $4,800 cash from the bank.
3. Adjusted the accounting records to recognize accrued interest expense on the bank note. The note, issued on August 1, Year 1, had a one-year term and a 6 percent annual interest rate.

Required

a. What is the amount of interest expense in Year 1?

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

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 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.