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On January 1, Year 1, the Platte Corporation issues a 5-year note payable 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)Option A
B)Option B
C)Option C
D)Option D

Question

[The following information applies to the questions displayed below.]

On January 1, Year 1, the Platte Corporation issues a 5-year note payable 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)Option A 
B)Option B 
C)Option C 
D)Option 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,decrease liabilities (the carrying value of installment notes payable)by $906,which the difference between the payment of $1,156 and the interest expense of $250,and decrease stockholders' equity (retained earnings)by $250.It will increase expenses (interest expense)by $250,which will decrease net income.The principal portion of $1,156 of the payment is reported as a cash outflow for financing activities,while the interest portion of $250 will be reported as a cash outflow for operating activities.

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