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On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year.
-Niagara records the first year's interest payment on December 31,Year 1.Centennial's prime rate is 4% for Year 1.Which of the following shows the effect of this event on the elements of the financial statements?

Question

Quizplus · Accepted Answer

Year 1 Interest expense = Principal balance on January 1 of $2,000 × (4% + 1%) = $100
The interest payment decreases assets (cash) and decreases stockholders' equity (retained earnings). It increases expenses (interest expense), which decreases net income. It is reported as a cash outflow for operating activities on the statement of cash flows.

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