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On January 1,Year 1,Wilson Company Borrowed $70,000 from State Bank

Question 41

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On January 1,Year 1,Wilson Company borrowed $70,000 from State Bank.The note stipulates a 3-year term with a 3 percent interest rate.On December 31,Year 1,Wilson recorded an adjusting entry to accrue interest expense.Based solely on these events,indicate whether each of the following statements is true or false.

Premises:
The Year 1 income statement is not affected because interest expense has been accrued but not paid.
Accruing interest expense in Year 1 increased a liability.
Accruing interest expense is a claims exchange transaction.
The Year 1 statement of cash flows will show a $70,000 cash inflow from investing activities.
Both assets and equity decreased in Year 1 as a result of this transaction.
Responses:
True
False

Correct Answer:

The Year 1 income statement is not affected because interest expense has been accrued but not paid.
Accruing interest expense in Year 1 increased a liability.
Accruing interest expense is a claims exchange transaction.
The Year 1 statement of cash flows will show a $70,000 cash inflow from investing activities.
Both assets and equity decreased in Year 1 as a result of this transaction.
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