Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions.The amount of net income on the Year 2 income statement would be:

Question

Quizplus · Accepted Answer

The correct answer is A. The net income on the Year 2 income statement would be $770. This is calculated by taking the cash revenue earned in Year 2 ($1,400) and subtracting the interest expense on the note ($36,000 x 7% = $2,520). The result is $1,120. From this, we subtract the cash revenue earned in Year 1 ($1,700) to arrive at the net income of $770.

Riley Company Borrowed $36,000 on April 1, Year 1 from the Titan