The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. Which of the following shows the effect of the December 31, Year 1 payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal. Which of the following shows the effect of the December 31, Year 1 payment?

A) Choice A 
B) Choice B 
C) Choice C 
D) Choice D

Quizplus · Accepted Answer

Interest expense for Year 1 = $5,000 × 5% = $250. The first annual payment of $1,156 will decrease assets (cash) by $1,156. Liabilities (notes payable) will be decreased by the difference between the payment and the interest expense ($1,156 − $250). The interest expense will decrease net income and equity. The principal portion ($1,156) of the payment is reported as a cash outflow for financing activities and the interest portion ($250) will be reported as a cash outflow for operating activities.

The Platte Corporation Issues a 5-Year Note Payable on January