Franklin Company issued a $40,000 note to the Mercantile Bank on August 1,Year 1.The note carried a one-year term and a 12% rate of interest.How will the adjustment,dated December 31,Year 1,to record accrued interest expense impact the elements of the financial statements?

Question

Quizplus · Accepted Answer

Accrued interest expense = $40,000 × 12% × (5 ÷ 12) = $2,000
The adjustment to accrue interest expense will increase liabilities (interest payable) and decrease stockholders' equity (retained earnings). It increases expenses, which will decrease net income. It does not affect the statement of cash flows.

Franklin Company Issued a $40,000 Note to the Mercantile Bank