On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. Niagara records the first year's interest payment on December 31, Year 1. Centennial's prime rate is 4% for Year 1. Which of the following answers shows the effect of this event on the financial statements?

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

Question

On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year. Niagara records the first year's interest payment on December 31, Year 1. Centennial's prime rate is 4% for Year 1. Which of the following answers shows the effect of this event on the financial statements?

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

Quizplus · Accepted Answer

Interest expense = $2,000 principal balance × (4% + 1%) = $100; The interest payment decreases assets (cash) and increases expenses (interest expense), which decreases net income and equity. It is reported as a cash outflow for operating activities on the statement of cash flows.

On January 1, Year 1, the Niagara Corporation Arranges a $6,000