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. The accrual of interest on December 31, Year 1 will:

Question

Quizplus · Accepted Answer

$40,000 principle × 12% × 5 months ÷ 12 months = $2,000 interest expense. The accrual will increase liabilities (interest payable) and increase expenses, which will decrease net income and equity.

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