Chapter 2, Problem 36BE

a)

To determine

Ascertain the amount of interest expense that would be recognized by Company C for the year ending December 31, 2016.

Explanation of Solution

Ascertain the amount of interest expense that would be recognized by Company C for the year ending December 31, 2016.

Company C borrowed $120,000 cash by issuing note payable on August 1, Year 2016. 3%is the rate of interest and one-year is the maturity period.

Calculate the amount of interest expense for December 31, 2016.

$\begin{array}{c}\text{Interest expense}=\text{Note payable}\times \text{Rate of interest}\times \text{ Time}\\ =\$120,000\times 3\%\times \frac{5\text{months}}{12\text{months}}\\ =\$1,500\end{array}$

Therefore, the amount of interest expense that would be recognized by Company C for the year ending December 31, 2016 is $1,500.

b)

To determine

Show the effect of adjusting the accrued interest expense on accounting equation.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

Assets = Liabilities + Shareholders Equity

Show the effect of adjusting the accrued interest expense on accounting equation.

Corporation A
Accounting Equation for Year 2016
Event	Assets	=	Liabilities			+	Stockholders’ Equity
	Cash	=	Note payable	+	Interest payable	+	Common stock	+	Retained Earnings
Note payable	($120,000)		$120,000		NA		NA		NA
Adjusting entry (1)	NA				1,500		NA		($1,500)

Table (1)

Accrued interest expense increases the interest expense account and interest payable account. Increase in interest expense decreases the retained earnings and increase in interest payable account increases the liability.

c)

To determine

Ascertain the amount of interest expense that will be paid by Company C in the Year 2016.

Explanation of Solution

There is no word about the interest payment dates. Therefore it is assumed that the interest is paid on the maturity date. Note payable is issued on August 1, 2016. Thus, the interest would be paid on August 1, 2017 only.

Therefore, no interest will be paid by Company C in the Year 2016.

d)

To determine

Ascertain the amount of interest payable as on December 31, 2016.

Explanation of Solution

Interest payable: It is an amount of interest expense which is recognized but not paid by the company. It is reported in the balance sheet under the head liabilities.

Ascertain the amount of interest payable as on December 31, 2016.

$\begin{array}{c}\text{Interest expense}=\text{Note payable}\times \text{Rate of interest}\times \text{ Time}\\ =\$120,000\times 3\%\times \frac{5\text{months}}{12\text{months}}\\ =\$1,500\end{array}$

$1,500 is the amount of interest expense recognized by Company C but not paid. Therefore, $1,500 is the amount of interest payable as on December 31, 2016.

e)

To determine

Ascertain the amount of cash which will be paid for interest expense in the year 2017.

Explanation of Solution

Ascertain the amount of cash which will be paid for interest expense in the year 2017.

$\begin{array}{c}\text{Interest expense}=\text{Note payable}\times \text{Rate of interest}\times \text{ Time}\\ =\$120,000\times 3\%\\ =\$3,600\end{array}$

Therefore, $3,600 is the amount of cash which will be paid as interest expense in Year 2017.

f)

To determine

Ascertain the amount of interest expense that would be recognized by Company in Year 2017.

Explanation of Solution

Ascertain the amount of interest expense that would be recognized by Company C in Year 2017.

Company C borrowed $120,000 cash by issuing note payable on August 1, 2017. 3%is the rate of interest and one-year is the maturity period.

Calculate the amount of interest expense that would be recognized by Company C in Year 2017.

$\begin{array}{c}\text{Interest expense}=\text{Note payable}\times \text{Rate of interest}\times \text{ Time}\\ =\$120,000\times 3\%\times \frac{7\text{months}}{12\text{months}}\\ =\$2,100\end{array}$

Therefore, the amount of interest that would be recognized by Company C in the Year 2017 is $2,100.

g)

To determine

Ascertain the amount of interest payable as on December 31, 2017.

Explanation of Solution

Interest payable: It is an amount of interest expense which is recognized but not paid by the company. It is reported in the balance sheet under the head liabilities.

Ascertain the amount of interest payable as on December 31, 2017.

There is no interest payable as on December 31, 2017.

The amount of interest is paid at the time of maturity of notes payable. Notes payable maturity date is August 1, 2017. Thus, there is no amount is left in the interest payable account at the end of year December 31, 2017.