On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $81,150. Which choice reflects the financial statement effects of the cash payment on December 31, Year 1?

Question

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The December 31, Year 1 payment will decrease assets (cash), decrease liabilities (notes payable) for the amount of the principal repayment, and increases expenses for the amount of the interest expense, which decreases net income and equity. The principal repayment is reported as a cash outflow for financing activities and the interest payment is reported as a cash outflow for operating activities.

On January 1, Year 1, the Mahoney Company Borrowed $324,000