Ben Bradley started Bradley Company on January 1, Year 1. The company experienced the following events during its first year of operation. 1. Earned $3,400 of cash revenue for performing services. 2. Borrowed $4,900 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 12 percent annual interest rate. Required a. What is the amount of interest expense in Year 1? (Do not round intermediate calculations.) Interest expense b. What amount of cash was paid for interest in Year 1?
Ben Bradley started Bradley Company on January 1, Year 1. The company experienced the following events during its first year of operation. 1. Earned $3,400 of cash revenue for performing services. 2. Borrowed $4,900 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 12 percent annual interest rate. Required a. What is the amount of interest expense in Year 1? (Do not round intermediate calculations.) Interest expense b. What amount of cash was paid for interest in Year 1?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Understanding Horizontal Statements Models**
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. Also, 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. (In the Cash Flows column, select "NA" if there is no effect.)
**BRADLEY COMPANY**
**Statements Model for Year 1**
| Event No. | Balance Sheet | Income Statement | Statement of Cash Flows |
| --- | --- | --- | --- |
| | Assets | = | Liabilities | + | Stockholders' Equity | Revenue | - | Expense | = | Net Income | |
| | Cash | | Notes Payable | + | Int. Payable | + | Common Stock | + | Retained Earnings | | | | |
| 1 | I | NA | NA | + | I | NA | NA | I | NA | OA |
| 2 | | | | | | | | | | |
| 3 | | | | | | | | | | |
In this educational exercise, students are required to analyze how different financial events impact the various components of a company's financial statements. The table provided outlines the first event as an example. Each subsequent row should be filled out according to the effects of the specific financial event on the balance sheet, income statement, and cash flows.
- **Assets:** Changes in cash are noted here.
- **Liabilities:** These include notes payable and interest payable.
- **Stockholders' Equity:** This is affected by changes in common stock and retained earnings.
- **Income Statement:** Tracks revenue, expenses, and net income.
- **Statement of Cash Flows:** Identifies the nature of the cash flow (operating, investing, or financing) or indicates if there is no effect.
For instance, in Event 1:
- The company's cash increases (I).
- There are no changes to notes payable, interest payable, or retained earnings (NA).
- Common stock increases (I).
- No change in revenue or expense, hence no net income effect (NA).
- The cash flow is categorized as an Operating Activity (OA
![**Example Problem: Analyzing Business Transactions for Bradley Company**
**Overview:**
Ben Bradley started Bradley Company on January 1, Year 1. The company experienced the following events during its first year of operation:
1. Earned $3,400 of cash revenue for performing services.
2. Borrowed $4,900 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 12 percent annual interest rate.
**Required:**
a. **Calculate the amount of interest expense in Year 1.** (Do not round intermediate calculations.)
- **Interest Expense:**
b. **Determine the amount of cash paid for interest in Year 1.**
- **Interest Payment:**
**Solution Steps:**
1. **Interest Expense Calculation for Year 1:**
- The company needs to account for the interest accrued from August 1, Year 1 to December 31, Year 1 (5 months).
- To calculate the interest expense:
\[
\text{Interest Expense} = \text{Principal} \times \text{Annual Interest Rate} \times \frac{\text{Time Period}}{12}
\]
Where:
- Principal = $4,900
- Annual Interest Rate = 12% or 0.12
- Time Period = 5 months
- Interest Expense = $4,900 \times 0.12 \times \frac{5}{12}
2. **Cash Paid for Interest in Year 1:**
- Since the question involves accrued interest and the note began on August 1, the cash paid for interest by December 31 of Year 1 will be:
\[
\text{Interest Payment} = 0
\]
(assuming payments are due at the end of the note term).
Note: For accurate calculations, be sure to carry out the arithmetic based on the provided formulae.
By completing these calculations you will understand how interest expense is accrued and recorded within a company's financial statements, especially during partial periods.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbac5cd56-9885-4a25-8e51-dfc1bb78a29e%2F2ef1a4e1-f62d-41d4-8718-a1a36f89f415%2Fj66oaza_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Example Problem: Analyzing Business Transactions for Bradley Company**
**Overview:**
Ben Bradley started Bradley Company on January 1, Year 1. The company experienced the following events during its first year of operation:
1. Earned $3,400 of cash revenue for performing services.
2. Borrowed $4,900 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 12 percent annual interest rate.
**Required:**
a. **Calculate the amount of interest expense in Year 1.** (Do not round intermediate calculations.)
- **Interest Expense:**
b. **Determine the amount of cash paid for interest in Year 1.**
- **Interest Payment:**
**Solution Steps:**
1. **Interest Expense Calculation for Year 1:**
- The company needs to account for the interest accrued from August 1, Year 1 to December 31, Year 1 (5 months).
- To calculate the interest expense:
\[
\text{Interest Expense} = \text{Principal} \times \text{Annual Interest Rate} \times \frac{\text{Time Period}}{12}
\]
Where:
- Principal = $4,900
- Annual Interest Rate = 12% or 0.12
- Time Period = 5 months
- Interest Expense = $4,900 \times 0.12 \times \frac{5}{12}
2. **Cash Paid for Interest in Year 1:**
- Since the question involves accrued interest and the note began on August 1, the cash paid for interest by December 31 of Year 1 will be:
\[
\text{Interest Payment} = 0
\]
(assuming payments are due at the end of the note term).
Note: For accurate calculations, be sure to carry out the arithmetic based on the provided formulae.
By completing these calculations you will understand how interest expense is accrued and recorded within a company's financial statements, especially during partial periods.
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