On October 1, Year 1 Hernandez Company loaned $60,000 cash to Acosta Company. The one-year note carried a 6% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will affect Hernandez's financial statements?

Question

Quizplus · Accepted Answer

Option B shows the correct effect on Hernandez's financial statements. Accrued interest of $1,500 ($60,000 x 6% x 3/12) will be recognized as interest revenue on the income statement, increasing net income. It will also increase accounts receivable on the balance sheet, as Acosta Company will owe $61,500 in total ($60,000 principal + $1,500 interest). There will be no effect on cash or accounts payable.

On October 1, Year 1 Hernandez Company Loaned $60,000 Cash