Indicate whether each of the following statements is true or false.
a)An eight-month, 6% note for $10,000 will require the issuer to pay $600 in interest.b)Interest expense is considered an operating expense on the income statement.c)Payment of interest is considered an operating activity on the statement of cash flows.d)Payment of interest on a one-year note due on March 1 will include a reduction in liabilities.e)The adjustment to recognize interest expense is an asset use transaction.

Question

Quizplus · Accepted Answer

b)False c)True d)True e)Fa)This is false. Interest on this note (which has a term of 8 months)= $10,000 × 6% × (8 ÷ 12)months = $400.b)This is false. Interest expense is reported below operating income on the income statement.c)This is true. Payment of interest, like payment of all expenses, is reported as an operating activity on the statement of cash flows.d)This is true. Because interest on the note had been accrued at the end of the previous year, payment of interest involves a reduction of interest payable.e)This is false. The adjustment is a claims exchange transaction that increases liabilities (Interest Payable)and decreases stockholders' equity (Retained Earnings).

Indicate Whether Each of the Following Statements Is True or False